Finra’s examination program has found that a number of broker-dealers have been violating Regulation Best Interest by failing to highlight conflicts of interest with costly products and excessive recommendations.

That’s the upshot of the regulator’s 2024 annual report released today.

On June 30, 2020, Reg BI established a “best interest” standard of conduct for broker-dealers and associated persons when they make securities and account recommendations to retail customers, rules that prohibit them from putting their financial or other interests ahead of customers’.

In the report, the examiners said flatly that broker-dealers and advisors are still making recommendations of securities, investment strategies or account types, “without a reasonable basis to believe that they were in the best interest of a particular retail customer.”

Firms are also “failing to conduct a reasonable investigation of offerings prior to recommending them to retail customers,” the report noted. In effect, they’re relying on their past experience with the issuing companies.

Broker-dealers and advisors are also still recommending a series of transactions that don’t fit the customers’ investment profiles, including investments with high cost-to-equity ratios and high turnover.

While Reg BI requires firms and their associates to do due diligence on costs, examiners found they are “limiting consideration of cost solely to sales charges instead of also considering other relevant costs and fees, such as product or account-level fees, when recommending a product,” Finra said.

Examiners also found that firms and their advisors are recommending complex or illiquid products “that are inconsistent with the retail customer’s investment profile by, for example, exceeding concentration limits specified in a firm’s policies, or comprising a sizable portion of a retail customer’s liquid net worth or securities holdings,” the report said.

Reg BI was touted by the SEC as a means for eradicating costly conflicts of interest among brokers involving recommended strategies and transactions, but a number of these conflicts are seemingly hard for advisory firms to rid themselves of, especially when it comes to disclosures about revenue-sharing arrangements and the sale of affiliated private funds that might put the broker’s interest ahead of the customer’s.

Firms are also struggling to address all the potential conflicts in their business models, such as limits on their investment menus, accounts and strategy offerings.

Finra also found that firms are failing to adopt and implement written policies and procedures showing how they’re going to comply with these requirements. For example, some firms are “requiring associated persons to consider costs and reasonably available alternatives when making recommendations, but not specifically addressing or detailing how associated persons should do so,” the report said.

Additionally, firms are running into problems when it comes to ensuring their variable annuities recommendations are compliant with Reg BI, which requires they adequately collect and hold on to key information about transactions and train registered representatives and supervisors to determine whether variable annuity exchanges comply with Reg BI standards.

For the first time, Finra has also flagged crypto asset developments. Crypto asset-related retail communications reviewed by Finra’s Advertising Regulation Department have a non-compliance rate that is significantly higher than that of other products, said the regulator, which is working to finish a crypto examination review it launched in 2022.