FINRA 'Ready to Act' if SEC Finalizes Best-Execution Rules: CEO
What You Need to Know
According to FINRA CEO Robert Cook, one of the top priorities for 2023 is ensuring regulatory clarity on evolving best-execution standards.
The self-regulatory organization is also hard at work processing criticism and discussion of its proposed Rule 3110, which involves remote office audit requirements.
Other key focal points are cybersecurity threats and advisor-client communication monitoring issues.
FINRA CEO Robert Cook said Wednesday that the self-regulatory organization is prepared to act swiftly to ensure its members are not subject to confusion regarding best-execution standards when enacting trades and other transactions for clients.
Cook made that suggestion during a live discussion hosted in New York by The Securities Industry and Financial Markets Association’s Compliance & Legal Society that featured Cook and Greg Ruppert, executive vice president of member supervision at the Financial Industry Regulatory Authority.
The discussion, which was moderated by Saima Ahmed, SIFMA’s newly appointed general counsel, focused on FINRA’s recently published 2023 priorities and examination findings.
According to Cook and Ruppert, FINRA’s staff and leadership have more on their plate than ever before, with priorities across all aspects of member firm operations.
On one front, cybersecurity threats are ever-growing, with the frequency, sophistication and variety of attacks all continuing to increase. At the same time, FINRA is pushing forward its internal review of member firm communications and disclosures to customers, especially those relating to complex products and the clients’ best interest.
Cook and Ruppert also emphasized that FINRA has observed potential issues with emerging communication platforms and mobile apps. They specifically urged firm leaders to focus on this area and proactively install, police and regularly update their staff communication-monitoring procedures to reduce the risk of recordkeeping failures.
While much of the discussion closely mirrored the information contained in FINRA’s 2023 priorities and examinations report, Cook and Ruppert also took time to address some broader issues, including the news that the Securities and Exchange Commission has proposed a new best-execution rule.
While he emphasized that the SEC’s rule is still in the early innings, Cook said that FINRA stands ready to act to update or modify its own best execution rule framework to reduce any regulatory duplication or outright discrepancies that could emerge from the SEC’s process.
Best Execution in Focus
As Cook pointed out, FINRA already has a best-execution rule (5310). While the rule was published decades ago, he said, it has been supplemented over time with lots of guidance.
Market compliance experts, for their part, tend to view the FINRA framework as somewhat outdated. Indeed, the SEC’s leadership says it is looking to take control of the best-execution issue and conduct a full refresh, given that much of FINRA’s rule framework is based on guidance that is not necessarily enforceable.
In digesting the SEC’s proposal, other experts have emphasized that the SEC should not lose track of the fact that investors may have different preferences for how brokers handle their trades. Some may prefer pursuing the best execution price, while others may prefer lower upfront cost or to avoid speed bumps that slow trading times.
As proposed, the SEC rule would establish a best-execution standard and require detailed policies and procedures for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers and more robust policies and procedures for entities engaging in certain conflicted transactions with retail customers. The proposal would also affect related review and documentation requirements.
While Cook declined to offer a direct opinion about the SEC’s proposed approach, he conceded that, as a self-regulatory organization, FINRA is obligated to follow in the SEC’s footsteps.
“What I can confirm today is that FINRA is following this process very closely, and we are working on a plan to deal with the potential uncertainty that would emerge if the SEC finalizes and begins enforcement of its own rule,” Cook said. “We understand that regulatory overlap and a lack of clarity would be a problem for our members.”
