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FINRA Amends Its Suitability, Capital Acquisition Broker Suitability and Non-Cash Compensation Rules to Comply with Sec’s Regulation Best Interest

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On June 19, 2020, FINRA issued Regulatory Notice 20-18, noting changes to FINRA’s suitability rule, Capital Acquisition Broker (“CAB”) suitability rule and rules governing non-cash compensation consistent with the requirements of the SEC’s Regulation Best Interest (“Reg BI”).  The changes were approved by the SEC and became effective on June 30, 2020, the compliance date of Reg BI.

Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations to “hold” securities.  FINRA Rule 2111 (Suitability) is composed of three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. To provide clarity on which standard applies, FINRA amended its suitability rule to state that Rule 2111 does not apply to recommendations that are subject to Reg BI.  FINRA also amended CAB Rule 211 (CAB suitability rule) consistent with the amendments to Rule 2111.

In compliance with Reg BI, FINRA Rules 2310 (Direct Participation Programs), 2320 (Variable Contracts of an Insurance Company), 2341 (Investment Company Securities), and 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) include provisions restricting the payment and receipt of non-cash compensation in connection with the sale and distribution of securities governed by those rules.

Reg BI also requires broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited time period. To avoid potential inconsistencies, FINRA has amended its non-cash compensation rules to provide that the practices addressed by those rules also must be consistent with Reg BI.

Should you have any questions, please contact one of the following partners at Winget Spadafora & Schwartzberg, LLP who are leading the firm’s effort in the defense of broker-dealers, financial advisors, and investment advisers across the United States.