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Don’t Panic: Business as Usual as FINRA Ramps Up Preparedness Reviews
Traders Magazine Online News, November 11, 2019
Recently, many in the broker-dealer industry awoke to news that FINRA will begin Regulation Best Interest “preparedness reviews” starting in November. The information came from a speech given to broker-dealer executives attending the SIFMA New York regional compliance and legal seminar and delivered by a regional director at FINRA. The revelation seemed to reverberate through the industry like a brush fire, and calls to our Subject Matter Expert team followed just as swiftly.
While we confirmed that preparedness reviews will commence starting November, our team felt that the implication of the statement was likely misunderstood. FINRA’s objective with its “preparedness reviews” is to simply engage in meaningful dialogues to determine how firms are preparing, how far along they are in those preparations, and what areas of Reg BI compliance are still unclear.
This situation certainly should not be viewed at as a threatening or stressful undertaking. Far from it. Firms should welcome these discussions with open arms. FINRA’s willingness to determine the preparedness of the industry, several months before the rule’s June 30, 2020 deadline, is an excellent way to ensure major overhauls to compliance programs are trending in the correct direction. The open dialogue FINRA is attempting to foster will ultimately give firms as much assistance as possible in implementing the more than 1,000 pages of regulations and supplemental materials.
At this somewhat early stage, it is vital for firms to determine what changes are necessary to their respective programs given the size and scope of their organizations and start to draft implementation procedures aimed at Q1 and Q2 of 2020. SEC Chairman Jay Clayton has stated numerous times over the course of his tenure that the SEC is “not in the surprise business”. With respect to Reg BI, Clayton is also quoted as saying, "When it's the law, we'll inspect against it.” Between these comments, and FINRA’s attempt to get the pulse of the industry months before implementation, any firms delaying action based on an anticipated grace period or temporary reprieve are engaging in a dangerous miscalculation.
There are many challenges associated with Reg BI compliance. At the heart of the regulation is the concept of monitoring actions at two points in time – at or before the recommendation takes place, and after a transaction occurs. Today, many firms have policies, procedures, and technology that determine some level of suitability for T+1 trading activity. Very few firms, if any, have policies, procedures, and technology that determine information related to recommendations. No registered firm is currently capable of correlating the two. All hope is not lost. Advancements in artificial intelligence technology and communication surveillance are making this seemingly insurmountable task possible.
We fully expect, in the coming months running up to the official June deadline, that our compliance team will continue to get many calls addressing inquiries around these monumental challenges. If institutions are planning their strategies and approaches well in advance, we are confident that a positive dialogue between all of the stakeholders in this community will contribute to successful adoption of Reg BI benefitting both the insitutions and the customers they serve.
David Ackerman is a Regulatory Subject Matter Expert at NICE Actimize
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