DUTIES AND CONFLICTS

Conflicts of Interest

FINRA Report on Conflicts of Interest

In 2013, FINRA published a Report on Conflicts of Interest on conflicts of interest in the broker-dealer industry to highlight effective conflicts management practices that may go beyond current regulatory requirements and identify potential problem areas. To help firms analyze the conflicts they face and implement a conflicts management framework appropriate to the size and scope of their business, the Report includes examples of how some large broker-dealer firms address conflicts. These practices—as well as those that are based on FINRA's experience and analysis—can help firms of all sizes improve their conflicts management practices. Of course, there is no one-size-fits-all framework. Firms need to assess the approach that is most effective for their particular circumstances.

• FINRA Report on Conflicts of Interest (October 2013):  FINRA published a Report on Conflicts of Interest in the broker-dealer industry to highlight effective conflicts management practices

 

Finra Topic Page:  Conflicts of Interest

General

(New) Modernization of Regulation S-K Items 101, 103, and 105

The SEC is adopting amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items have not undergone significant revisions in over 30 years. The amendments update these rules to account for developments since their adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.

SEC Release No. 33-10825 (August 26, 2020) (File No. S7-11-19; Final Rule): Modernization of Regulation S-K Items 101, 103, and 105.

 

(New) SEC Amends Definition of “Accredited Investor”

The SEC is adopting a rule to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition of accredited investor. The amendments are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933. Specifically, the amendments add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee,” expand the list of entities that may qualify as accredited investors, add entities owning $5 million in investments, add family offices with at least $5 million in assets under management and their family clients, and add the term “spousal equivalent” to the definition. The Commission is also adopting amendments to the “qualified institutional buyer” definition in Rule 144A under the Securities Act of 1933 to expand the list of entities that are eligible to qualify as qualified institutional buyers.

SEC Release No. 33-10824 (August 26, 2020) (File No. S7-25-19; Final Rule): Amending the “Accredited Investor” Definition.

 

Disclosure of Hedging by Employees, Officers and Directors

The SEC adopted a rule to implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rule requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director. The new rule requires a company to describe the practices or policies and the categories of persons they affect. If a company does not have any such practices or policies, the company must disclose that fact or state that hedging transactions are generally permitted. The new disclosure is required in a proxy statement or information statement relating to an election of directors. The rule became effective on March 8, 2019.

SEC Release No. 33-10593 (December 20, 2018), 84 FR 2402 (February 6, 2019): Disclosure of Hedging by Employees, Officers and Directors

 

Senior Designations

FINRA reminds firms of their supervisory obligations regarding the use of certifications and designations that imply expertise, certification, training or specialty in advising senior investors (senior designations). Regulatory Notice 11-52 outlines findings from a survey of firms and highlights sound practices used by firms with respect to senior designations. Firms are encouraged to adopt the practices that are outlined in this Notice to strengthen their own supervisory procedures, as appropriate to their business.  

FINRA Regulatory Notice 11-52 (November 2011):  FINRA Reminds Firms of Their Obligations Regarding the Supervision of Registered Persons Using Senior Designations

• Professional Desigantions Database: Use this tool to decode the letters that sometimes follow a financial professional’s name and see whether the issuing organization requires continuing education, takes complaints or has a way to confirm who holds the credential.

Political Contributions

FINRA ‘‘Pay-To-Play’’ and Related Rules

The SEC approved FINRA Rules 2030 (Engaging in Distribution and Solicitation Activities with Government Entities) and 4580 (Books and Records Requirements for Government Distribution and Solicitation Activities) to establish “pay-to-play” and related rules regulating the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. The rules became effective on August 20, 2017.

FINRA Regulatory Notice 16-40 (October 2016): SEC Approves FINRA “Pay-To-Play” and Related Rules

Recordkeeping

Custodian of Books and Records

The SEC approved a proposed rule change to amend FINRA Rule 4570 (Custodian of Books and Records) to: (1) provide a member firm that is filing a Form BDW (Uniform Request for BrokerDealer Withdrawal) the option of designating another FINRA member firm as the custodian of its books and records on the form; (2) clarify the obligations of the designated custodian; and (3) require the designated custodian to consent to act in such a capacity. These changes became effective on August 19, 2019.

FINRA Regulatory Notice 19-16 (April 22, 2019): SEC Approves Amendments to FINRA Rule 4570

 

Third-Party Recordkeeping Services

This Notice provides firms with information regarding recent guidance issued by SEC staff regarding the use of recordkeeping services provided by third parties to preserve records pursuant to SEA Section 17(a) and SEA Rule 17a-4.

FINRA Regulatory Notice 18-31 (September 14, 2018): SEC Staff Issues Guidance on Third-Party Recordkeeping Services

Regulation Best Interest

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

The SEC is adopting a new rule, establishing 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) (File No. S7-07-18): Regulation Best Interest: The Broker-Dealer Standard of Conduct

 

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

 

(New) Suitability and Non-Cash Compensation

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

Supervision

FINRA Supervision Topic Page

This site highlights FINRA Rules 3110, 3120, and 3130 on supervisory procedures.  It also contains links to related notices, guidance, news, and investor education.

• FINRA Topic Page:  Supervision

 

Heightened Supervision

FINRA is reminding member firms of their supervisory obligations regarding associated persons with a history of past misconduct that may pose a risk to investors. FINRA Rule 3110 (Supervision) requires member firms to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and FINRA rules. An effective supervisory system plays an essential role in the prevention of sales abuses, and thus enhances investor protection and market integrity. As such, FINRA has long emphasized that member firms have a fundamental obligation to implement a supervisory system that is tailored specifically to the member firm’s business and addresses the activities of its associated persons. The Notice highlights particular instances where heightened supervision of an associated person may be appropriate. FINRA is encouraging firms to adopt the practices that are outlined in the Notice to strengthen their own supervisory procedures, as appropriate to their business.

FINRA Regulatory Notice 18-15 (April 30, 2018): Heightened Supervision, Guidance on Implementing Effective Heightened Supervisory Procedures for Associated Persons With a History of Past Misconduct