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The Financial Industry Regulatory Authority has released a notice pointing broker-dealers to guidance issued by the Securities and Exchange Commission designed to help BDs comply with the agency’s Regulation Best Interest as both regulators continue bringing enforcement actions related to the rule.

In late November, FINRA barred a broker for excessive churning in the accounts of multiple customers, resulting in more than $2.3 million in losses and thereby violating Reg BI.

In its just-released Notice 23-20, FINRA highlights the SEC’s series of Staff Bulletins reiterating standards of conduct for broker-dealers and investment advisors regarding:

In mid-November, the SEC charged two Laidlaw brokers with violating Reg BI’s care obligation through a series of recommendations to four retail customers.

The recommendations, according to the SEC order, were made by brokers Richard Michalski and Michael Murray without a reasonable basis to believe that the transactions “were not excessive when taken together in light of the retail customer’s investment profile, and because the series of recommended transactions placed the financial interest of the registered representatives ahead of the interest of the retail customer,” therefore violating the “quantitative prong” of Reg BI’s care obligation.

The SEC ordered Laidlaw to pay disgorgement of $547,712, prejudgment interest of $51,844 and civil penalties of $223,328, for a total of $822,885, to the SEC for failing to supervise the reps.

FINRA notes in its notice that the SEC and its staff have provided guidance and other resources to assist BDs in understanding and implementing the Reg BI requirements.

Among these resources are a Small Entity Compliance Guide, Frequently Asked Questions, a No Action Letter, a 2020 Risk Alert and a 2023 Risk Alert.

The bulletins, FINRA states, emphasize that both Reg BI and the fiduciary standard under the Advisers Act  are “drawn from key fiduciary principles” that impose an obligation to act in a retail investor’s best interest and, although the specific application of the two standards may differ in some respects, they “generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.”

Melanie Waddell

@Think_MelanieW

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