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.

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