Senators: ‘Hey, FINRA – What Do You Think of the SEC’s Proposal?’

A group of U.S. senators has reached out to FINRA for some help understanding the “confusing and ambiguous ‘Best Interest’ standard” put forth by the Securities and Exchange Commission that “appears to be similar to FINRA’s existing suitability standard.”

The letter, from Sens. Elizabeth Warren (D-MA), Sherrod Brown (D-OH) and Cory Booker (D-NJ) reaches out to FINRA President and CEO Robert Cook “because FINRA serves as the primary regulator of the brokerage industry, your interpretation of the SEC’s proposal is critical to understanding how the proposal would affect retail investors.”

In the letter, the three top Democratic senators on the Senate Banking Committee ask Cook to provide FINRA’s “views on the proposal promptly so that we and other interested parties can account for those views in any comments we submit to the SEC.”

Despite that positioning, the senators clearly have concerns. “Despite its title implying a much more stringent standard, this proposal is unlikely, for several reasons, to give investors the peace of mind they deserve that the advice they are receiving is truly in their best interests,” they write, going on to cite as an example that, “the proposal does not explicitly prohibit the most egregious sales practices that clearly incentivize brokers to put their own interests ahead of their clients, such as sales quotas and contests.”

They go on to explain that, “The SEC’s proposed rulemaking package is long, complicated, and, in some important ways, ambiguous.”

Apparently in an effort to resolve that ambiguity – or to force FINRA’s hand – the senators pose six specific questions (with some sub-questions), to which they expect a response no later than Aug. 3, notably regarding:

  • How FINRA views the proposed rulemaking package as containing different requirements for broker-dealers from those that exist currently, including FINRA’s existing suitability obligations.
  • Referencing Regulation Best Interest’s requirement to disclose and mitigate, or eliminate material conflicts of interest, how FINRA would interpret the word “mitigate” in this context.
  • The options a retail investor would have to vindicate the protections included in the rule “if he or she were cheated by a noncompliant broker-dealer.”
  • A list of “any undefined terms for which a clear definition would help FINRA better understand its enforcement responsibilities in the case that the proposal is finalized.”
  • Any feedback that FINRA has (already) provided to the SEC on the proposal – or if not, whether it plans to do so.

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