Dear ADISA members and, in particular, those members involved in the retail distribution and sale of products by broker-dealers such as non-listed REITs, BDCs and others that have drawn interest from FINRA and other regulators for their potential cost, illiquidity and complexity:

FINRA has just issued its 2023 Report on its Examination and Risk Monitoring Program. It is a lengthy (75+ page) document, and it contains detailed discussions of issues that FINRA’s examination staff is encountering or expects to encounter in its examinations of broker-dealers, based both on what it has seen in recent examinations as well as what it knows to be applicable frameworks for FINRA member firms.

While all of these issues are potentially applicable to member firms (e.g., cybersecurity and communications with the public concerns), there is one section of particular importance to firms that make recommendations regarding investment products and services to “retail” customers within the meaning of Regulation BI. This section is entitled “Communications and Sales - Reg BI and Form CRS,” and runs for a full 8 pages. The section includes a discussion of “Regulatory Obligations and Related Considerations,” and perhaps even more importantly one that is titled “Findings and Effective Practices.” We don’t want to overstate the importance of this latter section, but we think that it is accurate to view it and the various findings and suggestions set forth therein as a road map to your firm’s next examination on the topic of Regulation BI compliance.

Acting through its Standards and Legislative & Regulatory Committees’ joint efforts, ADISA intends to provide guidance to members who are broker-dealers and who work with broker-dealers on how to structure their operations and approach(es) to be synchronized to the extent possible with FINRA’s findings and recommendations. Look for that in the near future – given its importance, these Committees are making it a priority. In the meantime, you can review a copy of the report itself, and would suggest that firms pay particularly close attention to pp. 31-38 of the PDF.

As of Monday, Jan. 30, the SEC’s Division of Examinations released its own Risk Alert on Regulation BI practices and procedures that it observed during examinations of broker-dealers. You can read the alert here.

As always, please let us know what we can do to help bring educational tools and practice-enhancing techniques to ADISA members.

Sincerely,
John H. Grady, ABR Dynamic Funds, and Catherine Bowman, The Bowman Law Firm
ADISA's Legislative & Regulatory Committee Co-Chairs