When the Securities and Exchange Commission finalizes its standards-of-conduct package, the Financial Industry Regulatory Authority will re-examine its suitability rule for broker-dealers, Robert Colby, chief legal officer at FINRA, said Tuesday.
Once implemented, FINRA will enforce the rule. With that in mind, FINRA will "look to see if there's any reason for us to continue to have a separate suitability rule because ... we don't want to get inconsistent in any way," Mr. Colby said during a panel discussion at the Securities Industry and Financial Markets Association's annual compliance seminar in Phoenix.
Last year, SEC commissioners advanced a standards-of-conduct package, which has become commonly known as Reg BI, for one of the three legs of the proposal. It includes a best-interest standard that compels brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts.
The agency said it will issue a final rule by September.
FINRA's suitability rule requires, in part, that a broker-dealer or associated person has "a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer."
"There's a lot of overlap between the existing suitability rule and the direction that Reg BI's going in order to mitigate conflicts," Mr. Colby said Tuesday, adding that FINRA could tweak its rule, if necessary. "If we do keep it we want to make sure that they're completely aligned," he said.
Also on the panel, Brett Redfearn, director of the SEC's division of trading and markets, said Reg BI is a top priority for the commission. "Ultimately, we're walking into a world where it becomes very clear that a broker-dealer cannot put his or her interest ahead of a customer when making a recommendation," he said.
Those types of conflicts of interest are a focus for the SEC, Mr. Redfearn added. "This really does go beyond the suitability (rule) as it's currently understood because not only do we need to disclose conflicts, but mitigate conflicts where they can be mitigated."
