Stockbrokers have received official notice from Wall Street watchdogs. Either understand the nuances of all the investments we recommend and follow the Reg BI or face the penalties.
The Financial Industry Regulatory Authority, the self-regulatory overseer of over 600,000 brokers, has issued a warning about its standards of customer care in its latest annual report on regulatory and inspection priorities. Electronic communications to money laundering or market manipulation.
The regulatory Best Interest promulgated by the Securities and Exchange Commission, known as Reg BI, will take effect in June 2020, requiring brokers to put their clients’ interests first. Unlike fiduciary standards (higher standards of client care that apply to independent financial advisors), Reg BI only requires brokers to disclose conflicts of interest to their clients, not to eliminate them entirely. I don’t. Conflicts of interest often arise because brokers earn commissions from the products they sell. In contrast, independent advisors have no financial incentive to trade individual funds or securities.
Carlo Di Florio, a global advisory leader at the ACA Group, which advises financial services firms on regulatory compliance, said regulators are giving firms a grace period to try “in good faith” to fully comply with the new rules. You said you have a lot to give. For FINRA 75 page report If the report on the review and risk monitoring program is any indication, the period is over.
“The training wheels are off now,” Di Florio said. “The Regulation exists and we have had many opportunities to build guidance and programs, so we plan to conduct deeper testing to see how well we comply with key elements of the Regulation.”
So far, Reg BI enforcement is rare.Last October, FINRA first case for regulatory violations against brokers who agreed to settle charges of excessive trading with $5,000. case We have filed a lawsuit against dual-registered brokerage firm and investment advisor Western International Securities and five of its brokers. The SEC action is pending in federal court in California.
Bill St. Louis, Vice President of FINRA National Cause and Financial Crime Detection Program, podcast FINRA’s report states, “We continue to see examples of brokers recommending products they don’t understand…if they don’t understand the core components of the product, it’s going to be a Reg BI problem.”
According to St. Louis, the first question FINRA representatives ask when testing their understanding of a particular investment a broker recommends is, “How does this product work?”
The report calls attention to several new areas that FINRA wants brokers to keep in mind when trying to stay on the right side of Reg BI. It is no longer acceptable to think that an IRA is all you need when you are recommending rolling over to . Brokers now have to consider a number of factors, including the cost of transferring money, the number of investment options new accounts offer, and the ability of clients to make withdrawals without penalty. The same standards apply to almost all types of investments offered by the broker, including variable annuities and private his funds. According to FINRA, brokers should first consider cheaper and safer alternatives before recommending these products.
“I’ll look into it further. The intersection of complex products and Reg BI and complex productsThis has been a long-standing focus issue for FINRA,” said Michael Solomon, senior vice president of testing at FINRA, on the podcast.
Brokers should also monitor communications regarding cryptocurrencies to ensure they distinguish between regulated and unregulated digital assets.
Just as you should have a thorough understanding of the investment opportunities your broker recommends, you are also expected to know your client as an investor. FINRA requires brokers to maintain customer profiles listing details such as expected retirement age, assets on hand and risk tolerance.
Mr. Solomon said on the podcast that FINRA officials “saw some plain wrong interpretations of what a recommendation is.”
“And that’s an area we’re going to dig a little bit in terms of how companies decide what to recommend, whether they’re doing exactly that,” he added. , these are just a few of the areas where I think companies are likely to see a shift in what we’ve seen over the past year or two and turn around.”
FINRA reviews more than 3,000 brokerage firms under its jurisdiction at least once every four years. Companies that are considered more risky have him inspected more often, possibly once a year. FINRA also conducts investigations following customer complaints or similar reports.
DiFlorio said FINRA officials also want to make sure brokers properly report conflicts of interest. Form CRS, which stands for Customer Relationship Summary. Although Reg BI does not prohibit conflicts of interest, brokers should minimize or avoid conflicts whenever possible. ) must be reported on Form CRS. These forms must be posted on the Company’s website and revised periodically to disclose recent disputes.
DiFlorio said it was not uncommon in the days before Reg BI for FINRA and the SEC, Wall Street regulators and FINRA supervisors to file lawsuits alleging violations of previous standards of conduct by broker-dealers. . Considered weaker than Reg BI, its so-called suitability criteria asked brokers to ensure that they truly believed their recommendations would benefit their clients.
“I think what we’re going to see now is a steady stream of Reg BI cases, much like the suitability cases before,” Di Florio said. I will be able to endure it.”
DiFlorio said there is good news for brokers overwhelmed by the myriad of topics in the latest FINRA report. This document is created like an index that you can scan to find the topics of most interest. FINRA has bolded words describing new policies and developments.
Other highlights of the report include the following caveats:
Brokers are responsible for overseeing: Manipulative trading schemes. A particular type of fraud that has caught the eye of regulators in recent years involves so-called memetic stocks. The stock is cheap and easy to buy in large quantities. Scammers are using social media to misleadingly advertise it as a long-term investment, planning to sell it once the price reaches a certain level. A FINRA report warns that cheap initial public offerings (the first sale of a company’s shares) are now being used for similar purposes.
Di Florio said brokers could be approached by clients who convinced them on social media that they should invest their money in sketchy things. and it is the broker’s responsibility to do their best to persuade them to consider alternative investments.
- Brokers are responsible for complying with anti-money laundering laws and foreign sanctions. With the United States imposing restrictions on Russian trading in response to Moscow’s invasion of Ukraine, brokers must double-check the origin of funds they are asked to handle.
- Brokers should not only recommend the best possible investments to their clients, but also ensure that they are executing those investments in the best possible way. FINRA’s Regulation Best Execution rules are generally intended to ensure that brokers look at multiple locations where a particular stock may be sold and choose the platform that offers the lowest price. proposed by the SEC We implemented our own Regulation Best Execution as part of our plan to overhaul the US stock market.
- Brokers must have strong cybersecurity systems and procedures to protect client and business information.