Some broker-dealers failed in 2021 to meet the basic retail investor protection requirements outlined in Regulation Best Interest, keeping customers in the dark regarding their services, conflicts of interests and fees, according to the Financial Industry Regulatory Authority’s (Finra) “2022 Report on FINRA’s Examination and Risk Monitoring Program,” released today.

Finra examiners found that firms are failing to update their existing policies and procedures to reflect Reg BI’s requirements by “making recommendations that were not in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation,” the self regulator said.

Examiners also found that B-Ds and their registered reps recommended transactions that were excessive in light of a retail customer’s investment profile and “placed the broker-dealer’s or associated person’s interest ahead of those of retail customers.”

Firms also fell down on the job when it came to complying with Reg BI’s conflict of interest obligation. Firms failed to identify conflicts or, if identified, did not adequately address those conflicts.

Firms should be “identifying and mitigating conflicts of interest by identifying, disclosing, and eliminating or mitigating conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of their associated persons,” Finra said.

This requires that B-Ds establish and implement policies and procedures to identify and address conflicts of interest, such as through the use of conflicts committees or other mechanisms or creating conflicts matrices tailored to the specifics of the firm’s business that address.

Firms should be “identifying conflicts across business lines and how to eliminate, mitigate or disclose those conflicts.”

Finra also recommended that firms sample recommended transactions to evaluate how costs and reasonably available alternatives were considered.

To be in compliance, firms also need to provide resources to associated persons making recommendations that account for reasonably available alternatives with comparable performance, risk and return that may be available at a lower cost, such as: worksheets, in paper or electronic form, to compare costs and reasonably available alternatives; or  guidance on relevant factors to consider when evaluating reasonably available alternatives to a recommended product.

Finra also recommended limiting high-Risk or complex investments for retail customers by establishing product review processes to identify and categorize risk and complexity levels for existing and new products and limiting high-risk or complex product, transaction or strategy recommendations to specific customer types.

Some firms are even failing to properly use the terms “advisor” or “adviser,” Finra found. “Associated persons, firms or both, are using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration,” the regulator said.

When it comes to communicating fairly and effectively to customers, Finra found that some firms Reg BI disclosures were insufficient. They failed to provide retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with customers or any conflicts of interest that are associated with the recommendation.

Firms failed to provide disclosures on material fees received as a result of recommendations, including revenue sharing or other payments received from product providers or issuers, fees tied to recommendations to rollover qualified accounts, potential conflicts of interest, for instance “associated persons trading in the same securities in their personal accounts or outside employment”; and material limitations in securities offering, Finra found.

Examiners also found that B-Ds Form CRS, or customer relationship summary—the key customer disclosure required by Reg BI—had deficiencies and “significantly departed from the Form CRS instructions or guidance from the SEC’s FAQ on Form CRS.”

Top Form CRS deficiency involves inaccurately representing financial professionals’ disciplinary histories; failing to describe types of compensation and compensation-related conflicts; incorrectly stating that the firm does not provide recommendations; changing or excluding language required by Form CRS; and not resembling a relationship summary, Finra said.

The blueprint on not only what Finra examiners found in 2021 but expect to focus on in 2022, also noted that B-Ds failed to implement cyber-security and mobile app trading rules to safeguard client information.