SEC's Reg BI Doesn't 'Raise the Bar' Over FINRA's Suitability Rule: Consumer Groups

The groups sent the letter to Clayton after a recent hour-long meeting.

Robert Colby, FINRA's chief legal officer, said at an event in late March that as the enforcer of Regulation BI, FINRA will either revamp its current suitability rule once Reg BI is final or eliminate it.

"There's a lot of overlap between the existing suitability rule and the direction that Reg BI is going in order to mitigate conflicts," Colby said during a regulatory panel discussion at the Securities Industry and Financial Markets Association's annual compliance event in Phoenix.

After Reg BI is finalized, FINRA will "look to see first, is there anything different between our [suitability] rule and the way it [Reg BI] comes out? We'll fix that," Colby said. "We'll also look to see if there's any reason to continue to have a separate suitability rule, because we'll be enforcing Reg BI and we don't want to be inconsistent in any way."

If FINRA decides to keep its suitability rule, "we want to make sure they are completely aligned," Colby said.

Barbara Roper, director of investor protection for CFA, told ThinkAdvisor on Friday that because FINRA rules exist separate from SEC rules, a potential nixing by FINRA of its suitability rule would "not automatically follow" Reg BI adoption.

"But FINRA has indicated that it will look at updating its rules once the SEC finalizes a rule," Roper said. "If the SEC were to actually raise the standard, instead of simply codifying the FINRA standard as Reg BI as drafted would do, we would certainly look to FINRA to strengthen its rules as well and to enforce the heightened standard," she said.

The groups told Clayton that the following changes "are essential" if Reg BI is to qualify as a heightened standard:

• The Commission must adopt a principles-based definition of best interest that unequivocally raises the bar over the existing suitability standard. In defining the term, it must make clear that brokers are required to recommend the investments they reasonably believe are the best match for the investor from among the reasonably available investment options.
• If, as has been suggested, one goal is to ensure that brokers give greater consideration to costs in determining what investments to recommend, the rule should incorporate an explicit requirement to consider costs in the rule text. In addition to clarifying the definition of best interest in the actual text of the rule, the Commission must make changes to the rule Release to clarify and strengthen its interpretation of the best interest standard.