Regulation Best Interest: A Continuing Enforcement Priority

by Warren Seah

Regulation Best Interest (Reg BI), introduced by the Securities and Exchange Commission (SEC), has emerged as a significant focus for industry self-regulator Finra even after more than 3½ years since its implementation.

Bill St. Louis, Finra’s director of enforcement, recently discussed this issue on a podcast, highlighting the numerous cases related to Reg BI infractions that are currently in progress. Of particular concern are the duty-of-care obligations imposed on brokers by this rule.

Enforced from June 2020, Reg BI has already led to substantial regulatory action by Finra. The regulator has pursued 22 enforcement cases against firms, alleging violations of the rule. Reg BI requires brokers to diligently ensure that their recommendations are in the best interest of their clients and not driven by self-interest.

St. Louis explains, “We have observed cases involving excessive trading, concentrated product recommendations, and instances where brokers lacked crucial understanding of the product, resulting in harm to investors.”

It is worth noting that Finra is not alone in grappling with Reg BI compliance. The SEC and state regulators have also acknowledged the ongoing challenges faced by many firms. Finra has consistently echoed these concerns, as indicated in its annual compliance report released earlier this year.

Reg BI and Enhanced Enforcement Efforts

Expanding Areas of Focus

St. Louis, a prominent figure at Finra, has highlighted efforts to integrate enforcement with other divisions such as member supervision and market regulation. This collaborative approach allows for comprehensive evaluations of firms before launching formal enforcement actions. St. Louis emphasized that communication channels between teams remain open throughout the entire duration of an examination or investigation. Rarely does a referral to the enforcement division mark the first time Finra hears about a matter.

Prompt Action and Transparent Communication

St. Louis expressed his team’s commitment to expedite their work and swiftly address any industry wrongdoings. This involves removing bad actors from the industry promptly and ensuring restitution for clients who have been harmed by their brokers. Additionally, St. Louis stressed the importance of maintaining consistent communication with firms that are the subject of an enforcement action. Periodic check-ins and updates about the status of a matter are aimed at avoiding prolonged periods of silence.

With a focus on faster resolutions and enhanced communication, Finra aims to create a more streamlined and transparent enforcement process. By providing regular updates to firms, they seek to keep all parties informed about the progress of their cases.

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