Do You Have Reg BI Challenges? What NASAA Learned From It’s Reg BI Initiative

In September 2023, NASAA released the third in a series of reports announcing the results of examinations conducted by the states as part of their Reg BI Examination Initiative. Phase I of the examinations, conducted in 2018, established a baseline that compared the policies, procedures, and practices of FINRA firms operating under the suitability standard with the policies, procedures, and practices of investment advisers operating as fiduciaries. The Phase II (A) exam initiative took a more targeted and in-depth look at FINRA firms in the first year following the SEC’s compliance deadline for Reg BI. Both the Phase I and Phase II (A) exam initiatives focused on four types of complex, costly, risky products (CCRs), specifically leveraged and inverse exchange-traded funds, non-traded REITs, variable annuities and private placements.

Unlike the first two examination segments, the Phase II (B) examination segment was conducted through on-site or remote examinations performed by examiners from 25 states, evaluating FINRA firm compliance in years two and three of Reg BI. State examiners used a common set of examination modules that focused on the same four product types reviewed in the first two phases, as well as a comprehensive module that analyzed firm compliance with Reg BI’s overarching Compliance Obligation. Over 200 examinations were conducted, focused on qualitative findings to identify areas where FINRA firms were meeting or exceeding state expectations regarding Reg BI compliance (best practices), as well as identifying areas where FINRA firm compliance appeared weak.

After aggregating examination data and observations by state staff, Key Findings were made for Phase II(B), including:

• Firms have been updating their investor profile forms and enhancing their policies and procedures to focus more directly on Reg BI obligations, though more specific instruction is needed with respect to considerations of reasonably available alternatives and conflict mitigation;
• Firms recommending CCR products are imposing product-specific restrictions based on age, net income/worth, and risk profiles, and are using exception reports to monitor compliance with those restrictions;
• Firms are using helpful cost-comparison tools to better consider reasonably available alternatives, but are still ignoring common lower-cost and lower-risk products when recommending CCRs;
• Firms are still relying on financial incentives to sell CCR products and there is little uniformity in implementing effective firm mitigation strategies; and 
• Firms have not enhanced point-of-sale disclosure, but they have devoted significant time, energy, and effort to compliance with Reg BI’s Disclosure Obligation by crafting the Form CRS and detailed Supplemental Reg BI disclosures, along with disclosure information available via links to the firm’s website.

Other areas discussed in the II(B) Examination Report included:

• Commentary on firms’ compliance with Reg BI’s four component obligations :
• Best Interest
• Care
• Disclosure
• Conflict of Interest
• Best Practices for consideration of adoption by firms
• Presumptive Breaches (violations) and Opportunities for Improvement

Oyster Consulting’s compliance experts have extensive experience in ensuring broker-dealers and investment advisers meet the requirements of Reg BI.  Oyster Consulting can help your firm assess product governance and information sharing processes, test your supervision, review your technology platforms and provide training to ensure you are achieving compliance.