Regulatory Notice 23-20

The Financial Industry Regulatory Authority (FINRA) has issued a new Regulatory Notice (23-20) to inform of available resources and guidance for broker-dealers and investment advisers in complying with the Securities and Exchange Commission’s Regulation Best Interest (Reg BI) which requires broker-dealers to act in the best interest of their clients when recommending any particular investments or investment strategies.
Specifically, under Reg BI, broker-dealers are required to:
– disclose key facts about the client-broker relationship, including fees, conflicts of interest, and the nature of services offered;
– exercise reasonable diligence, care, and skill when making investment recommendations; and
– avoid or mitigate conflicts of interest when making recommendations.
FINRA now refers to the following three Staff Bulletins that were issued by the SEC and that shall help to adhere to these requirements:
1. Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors: This Bulletin in form of FAQs offers guidance to broker-dealers, investment advisers, and their affiliates on how they can fulfill their responsibilities when making account recommendations to retail investors (account recommendations refer to both products and subsequent types of accounts, e.g. investment vs. retirement account, that may be suitable for a client). It thereby sets out, among other things, the factors, broker-dealers shall consider in this context, including potential conflicts of interest, especially for financial professionals in dually registered or affiliated firms, available options for a client, and the costs associated with such options.
2. Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest: This Bulletin in form of FAQs offers guidance to broker-dealers, investment advisers, and their affiliates on how they may identify any potential conflicts of interest, the steps involved in such identification, and the factors to consider to mitigate any such conflicts of interest. It also sets out examples of conflicts of interest and touches on the information that shall be disclosed in this context to retail clients.
3. Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations: This last Bulletin covers the suitability and KYC-obligations of broker-dealers, investment advisers, and their affiliates which involve the obligation to ensure that the client understands the risks, benefits, and costs associated with a product or investment strategy or account type and to understand a client’s risk profile, its financial situation, risk tolerance, investment time horizon and other factors influencing an investment decision. It thereby clarifies relevant terms in this context, provides guidance as to how a firm can gain such understanding, and discusses how often such client assessments should be performed to ensure compliance with Reg BI.
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FINRA mentions various other available resources in the Notice, including news releases, podcasts, and checklists. Please refer to the original document to find out more about these resources.