Sales and Trading

Reg BI

Regulation Best Interest: The Broker-Dealer Standard of Conduct

This Notice reminds members of the SEC’s adoption of a best interest standard of conduct for broker-dealers and a relationship summary (Form CRS) delivery obligation and provides an SEC email address where members may submit questions about the new requirements. As more fully described in the Notice, the SEC encourages firms to actively engage with SEC staff as early as possible as questions arise when planning for implementation. Firms may send their questions by email to IABDQuestions@sec.gov. FINRA also will assist members in their implementation of the best interest standard in various ways.

• FINRA Regulatory Notice 19-26 (August 7, 2019): SEC Adopts Best Interest Standard of Conduct

Reg BI establishes a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities (“Regulation Best Interest”). Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, to: (1) act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and (2) address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where the SEC has determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict. The standard of conduct established by Regulation Best Interest cannot be satisfied through disclosure alone. The standard of conduct draws from key principles underlying fiduciary obligations, including those that apply to investment advisers under the Investment Advisers Act of 1940.

Importantly, regardless of whether a retail investor chooses a broker-dealer or an
investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.

The compliance date for this rule was June 30, 2020.

• Securities Exchange Act Release No. 86031 (June 5, 2019)84 FR 33318 (July 12, 2019): Regulation Best Interest: The Broker-Dealer Standard of Conduct (Final Rule)

 

FINRA Topic Page: SEC Regulation Best Interest (Reg BI)

 

Reg BI-Related Changes to FINRA Rules

FINRA has amended its suitability rule, Capital Acquisition Broker (CAB) suitability rule and rules governing non-cash compensation to provide clarity on which standard applies and to address potential inconsistencies with the SEC’s
Regulation Best Interest (Reg BI). These changes have been approved by the SEC and became effective on June 30, 2020, the compliance date of Reg BI.

• FINRA Regulatory Notice 20-18 (June 19, 2020): FINRA Amends its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest

Sales Practice

Alternative Mutual Funds

Recently, FINRA took enforcement action against several firms for failing to establish or maintain a reasonably designed supervisory system for recommendations of alternative mutual funds, also sometimes referred to as “alt funds” or “liquid alts” (“Alt Funds”). FINRA is continuing to note such deficiencies in its examinations and communications reviews of such products.

• FINRA Regulatory Notice 22-11 (April 19, 2022): FINRA Reminds Firms of Their Sales Practice Obligations for Alternative Mutual Funds

 

Rules to Address Brokers with a History of Misconduct

FINRA has adopted new rules to address firms with a significant history of misconduct. New Rule 4111 (Restricted Firm Obligations) requires member firms that are identified as “Restricted Firms” to deposit
cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations. New Rule 9561 (Procedures for Regulating Activities Under Rule 4111) and amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) establish a new expedited proceeding to implement Rule 4111. The new rules and rule amendments became effective on January 1, 2022. The first “Evaluation Date” for Rule 4111 was June 1, 2022.

• FINRA Information Notice February 1, 2022: FINRA Announces Rule 4111 (Restricted Firm Obligations) Evaluation Date

• FINRA Regulatory Notice 21-32 (September 28, 2021): FINRA Adopts Rules to Address Firms with a Significant History of Misconduct

• FINRA Regulatory Notice 21-09 (March 10, 2021): FINRA Adopts Rules to Address Brokers with a Significant History of Misconduct

Private Placements

FINRA Amends Rules 5122 and 5123 Filing Requirements

FINRA has adopted changes to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) to require members to file retail communications that promote or recommend private placement offerings that are subject to those rules’ filing requirements. The new filing requirements became effective on October 1, 2021.

• FINRA Regulatory Notice 21-26 (July 15, 2021): Private Placement Retail Communications

Products

(New) Enhancement to ACATS “Receiver Delete” Functionality for Alternative Investments

The NSCC administers ACATS, a system that automates and imposes specified duties and performance timeframes to facilitate the transfer of accounts, in whole or in part, from one firm to another. The NSCC recently announced a change to ACATS that will allow a receiving member (the firm slated to receive the customer’s account) to use the “receiver delete” function to remove alternative investments from an ACATS transfer. This Notice reminds members of their obligations under FINRA Rule 11870.

FINRA Regulatory Notice 22-19 (August 8, 2022): Enhancement to ACATS “Receive Delete” Functionality for Alternative Investments

 

Complex Products and Options

The availability of complex products and options can potentially expand the investment opportunities for retail investors and, if properly understood, offer favorable investment outcomes (e.g., enhancing returns, limiting losses or improving diversification). However, important regulatory concerns arise when investors trade complex products without understanding their unique characteristics and risks. Like complex products, trading in options may pose risks if investors do not have the financial experience to understand options and options trading strategies. Therefore, we have taken steps to address complex products and options over the years, including publishing guidance regarding sales practice concerns raised by complex products and options; issuing investor-focused alerts to highlight the risks of these products; adopting rules with specific requirements for particular complex products and for options; and examining members for compliance with SEC and FINRA rules. The number of accounts trading in complex products and options has increased significantly in recent years. As a result, we are again reminding members of their current regulatory obligations, including, as discussed below, the application of Regulation Best Interest (Reg BI) when broker-dealers and their associated persons make securities recommendations, and recommendations of investment strategies involving securities, to retail customers. In addition, we are soliciting comment on: (1) effective practices that members have developed for complex products and options, particularly when retail investors are involved; and (2) whether the current regulatory framework, which was adopted at a time when the majority of individuals accessed financial products through financial professionals, rather than through self-directed platforms, is appropriately tailored to address current concerns raised by complex products and options.

• FINRA Regulatory Notice 22-08 (March 8, 2022): Complex Products and Options

Options

Options Customer Account Approval and Supervision

Cboe reminds Trading Permit Holders and Members (collectively “Members”) of the approval requirements for customers seeking to trade options in their account. Members are prohibited from accepting orders from a customer to purchase or write an option contract unless the customer’s account has been approved for options transactions in accordance with the provisions set forth in the Exchanges’ rules governing the opening of accounts.

• CBOE Regulatory Circular 22-007 (March 15, 2022): Option Customer Account Approval and Supervision

Municipal Securities

(New) MSRB to End Regulatory Relief that Extended Certain Professional Qualification Requirements due to COVID-19

The Municipal Securities Rulemaking Board (MSRB) has announced August 29, 2022 as the expiration date of professional qualifications pandemic-related regulatory relief. Individuals associated with a dealer will have 120 calendar days from August 29, 2022 until December 27, 2022 to satisfy the professional qualification requirements under MSRB Rule G-3(b)(ii) (municipal securities principal); Rule G-3 (b)(iv)(B) (municipal fund securities limited principal); and Rule G-3(c)(ii) (municipal securities sales principal), as applicable. Likewise, registered persons of dealers will have 120 calendar days from August 29, 2022 until December 27, 2022 to complete the requirement under Rule G-3(i)(i)(A) to complete the Regulatory Element portion of continuing education.

MRSB Regulatory notice 2022-05 (July 25, 2022): MSRB to End Regulatory Relief that extended Certain Professional Qualification Requirements Due to COVID-19

 


(New) MSRB Applies Regulation Best Interest to Bank-Dealers and Amends the Quantitative Suitability Standard for Institutional SMMPs

The Municipal Securities Rulemaking Board (MSRB) received approval from the SEC on June 23, 2022, for amendments to MSRB Rule G-19, on suitability of recommendations and transactions, and MSRB Rule G-48, on transactions with sophisticated municipal market professionals (SMMPs). The amendments align Rule G-19 to the Commission’s Rule 15l-1 under the Exchange Act (“Regulation Best Interest”) for certain municipal securities activities of bank dealers (the “Bank Dealer Amendment”). The approved amendments to Rule G-48 modify the quantitative suitability obligation of brokers, dealers, and municipal securities dealers (collectively, “dealers”) for certain institutional SMMP customers (the “Quantitative Suitability Amendment”). The compliance date for the Quantitative Suitability Amendment was August 1, 2022. The compliance date for the Bank Dealer Amendment is August 1,
2023.

MSRB Regulatory Notice 2022-04 (June 24, 2022): MSRB Applies regulation Best Interest to Bank -Dealers and Amends the Quantitative Suitability Standard for Institutional SMMPs

 

SEC Approves Amendments to Rules G-10 and G-48 Clarifying Notification Requirements for Dealers

On October 5, 2021, the MSRB received approval from SEC for a rule change consisting of amendments to Rule G-10, on investor and municipal advisory client education and protection, clarifying and aligning the requirements for brokers, dealers and municipal securities dealers to provide required notifications under the rule directly to those customers for whom a purchase or sale of a municipal security was effected in the past year and to each customer who holds a municipal securities position. The SEC also approved an accompanying amendment to Rule G-48, on transactions with sophisticated municipal market professionals (SMMPs), allowing dealers to conditionally excluded SMMPs from the requirements under Rule G-10(a). The rules became effective on October 12, 2021.

• MSRB Regulatory Notice 2021-13 (October 6, 2021): SEC Approves Amendments to Rules G-10 and G-48 Clarifying Notification Requirements for Dealers