On January 9, 2024, the Financial Industry Regulatory Authority (FINRA) published its 2024 FINRA Annual Regulatory Oversight Report (Report).1 Previously titled Report on FINRA's Examination and Risk Monitoring Program, the Report is released each year and provides insight into findings from FINRA's oversight activities in key focus areas. For each area selected by FINRA, the Report outlines effective practices and common regulatory deficiencies FINRA has observed and identifies questions firms should consider in assessing their compliance programs. In this alert, we highlight some notable changes to this year's Report, including new topics and emerging risks as well as new findings and suggested considerations added by FINRA to existing sections. We have organized our key takeaways around three main topics: (i) sales practices, (ii) trading and (iii) other recent trends and emerging risks, including the use of artificial intelligence tools.

Key Takeaways Related to Retail Sales Practices

Regulation Best Interest (Reg BI): Focus on Care Obligation and Conflicts of Interest

Care Obligation

Reg BI establishes a "best interest" standard of conduct for broker-dealers and their associated persons when they recommend to retail customers any securities transaction or investment strategy involving securities, including account recommendations.2 The Report incorporates recent Securities and Exchange Commission (SEC) staff guidance on Reg BI's Care Obligation and identifies considerations for assessing and documenting "reasonably available alternatives" when making recommendations.3 Specifically, the Report identifies the following new considerations:

  • Does your firm and do its associated persons understand how they should consider reasonably available alternatives and, to the extent required by your firm's policies and procedures, when to document these considerations?
    • Do your firm and its associated persons consider the potential risks, rewards and costs associated with reasonably available alternatives?
    • Has your firm developed a process to identify the scope of reasonably available alternatives that its associated persons should evaluate?
      • Do your firm and its associated persons begin by considering a broader array of investments or investment strategies generally consistent with the retail customer's profile, before narrowing the scope of a smaller universe of potential investments or investment strategies, as the analysis becomes more focused on meeting the best interest of a particular retail customer?
    • Do your firm and its associated persons consider reasonably available alternatives to high-risk and complex products when making recommendations to retail customers? If so, how? When recommending a higher-cost or higher-risk product, do your firm and its associated persons consider whether any reasonably available alternatives are less costly or lower risk, and consistent with the retail customer's investment profile?4

While the Report lists a number of considerations that firms should assess as part of their Reg BI programs, it does not provide much detail on how firms should implement these considerations.5 Rather, it appears to provide firms with discretion to decide, for example, how to identify and consider "reasonably available alternatives" for different categories of investments and when and how to document those considerations. That said, firms should expect scrutiny of their processes to evaluate, document and supervise considerations of reasonably available alternatives, particularly when a lower-cost, less complex or lower-risk product may be available.

Relatedly, in the Report, FINRA includes a new finding that firms fail to comply with the Care Obligation by recommending complex or illiquid products that are inconsistent with a retail customer's investment profile when, for example, they exceed concentration limits specified in the firm's policies or comprise a sizable portion of a retail customer's liquid net worth or securities holdings.6 The Care Obligation, as it relates to complex or illiquid products, such as private placements, has also been a focus for the SEC's Division of Examinations, which included similar considerations in its discussion of Reg BI in its 2024 Examination Priorities. 7

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1. FINRA, 2024 FINRA Annual Regulatory Oversight Report (Jan. 9, 2024), https://www.finra.org/rulesguidance/guidance/reports/2024-finra-annual-regulatory-oversight-report (Report).

2. 17 C.F.R. § 240.15l–1.

3. Report, at 44–45 (incorporating elements of SEC Staff, Staff Bulletin: Standards of Conduct for BrokerDealers and Investment Advisers Care Obligations, SEC (Apr. 20, 2023), https://www.sec.gov/tm/standardsconduct-broker-dealers-and-investment-advisers).

4. Id. (emphasis added).

5. Id. at 43–51.

6. Id. at 47.

7. SEC Staff, Division of Examinations, 2024 Examination Priorities, SEC (Oct. 16, 2023), https://www.sec.gov/files/2024-exam-priorities.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.