Feb 17, 2022 | News

Finra Exams: Broker Dealer Common Deficiencies

On June 5, 2019 the SEC adopted a new rule under the Securities Exchange Act of 1934, establishing a standard of conduct for broker dealers and natural personals who are APs of broker dealers.  Regulation Best Interest enhances the broker dealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retain customers’ reasonable expectations by requiring broker dealers to act in the best interest of the retail customer at the time a recommendation is made, without placing the financial or other interest of the broker dealer ahead of the interests of the retail customer and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures designed to identify and fully and fairly disclose material facts about such conflicts.

The four specified component obligations include:

  • Disclosure obligation
  • Care obligation
  • Conflict of Interest Obligation
  • Compliance Obligation

Included in the rule package is Form CRS.  This is a Customer Relationship Summary that SEC registered broker dealers need to file as of June 30, 2020.  The Form CRS must be delivered to new retail investors and it must be prominently posted on their website.  Form CRS is designed to help retail investors make informed choices regarding what type of relationship best suits a retail investor’s circumstances and investment objectives.  It is intended to promote transparency.

Since implementation, Finra has found deficiencies in the following areas:

  • Filing to modify existing policies and procedures to reflect Reg BI’s requirements
  • Failure to limit high-risk or complex investments for retain customers
  • APs or firms using “advisor and adviser” in their titles without proper registration as such

The deficiencies also included Form CRS failures:

  • Failure to post the firm’s Form CRS on the website
  • Failure to describe types of compensation and related conflict
  • Deficient Form CRS Filings
  • Inaccurate or deficient disciplinary history of financial professionals
  • Excluding or modifying required language on Form CRS

To make sure you are in compliance please click here to review the SEC’s REG BI rules and guidance.