Reg BI enters Top 15 of customer claims in Finra arbitration

Regulation Best Interest has cracked the top 15 of Finra arbitration claims for the first time, after having been in force for two years.  

Reg BI reached 14^th place on the list of top controversy types for customer arbitration, according to statistics provided by the Financial Industry Regulatory Authority Inc. There have been 37 Reg BI cases served this year through May.

The rulemaking package that included the new broker-dealer standard of conduct was approved by the Securities and Exchange Commission in June 2019. In June 2020, Reg BI was implemented — and the agency started to enforce it. Finra, the broker-dealer self-regulator, also conducts examinations and oversees compliance with the rule.

The regulation is providing a new cause of action in the arbitration system that Finra runs to adjudicate disputes between customers, brokerages and registered representatives.

“An inevitable — if somewhat subtle — milestone was reached this month for Regulation Best Interest,” the Bates Group, a financial services consulting firm, said in an analysis. “This may represent a growing awareness of the SEC rule and is the first tranche of actionable claims since the final regulation went into effect on June 30, 2020.”

Reg BI replaced the previous suitability rule for brokers.

“Two years ago, Finra amended its suitability rule to state that [suitability] does not apply to recommendations that are subject to Reg BI, raising the possibility of a Reg BI claim in a Finra arbitration,” Julie Johnstone, managing director of Bates Group’s securities and financial services arbitration and litigation practice, said in a statement.

There were 330 suitability claims in Finra arbitration through May. Adam Gana, managing partner at the law firm Gana Weinstein, foresees Reg BI catching up.

“Reg BI is likely going to be as popular as suitability claims in Finra arbitration in the near future — I think as early as next year,” Gana said. “It’s absolutely trending in my practice.”

The top controversy in Finra arbitration is breach of fiduciary duty, which has been claimed in 485 cases this year. While brokers adhere to Reg BI, investment advisers continue to be governed by the fiduciary standard.

Nonetheless, a fiduciary violation is a popular claim in Finra arbitration. It will be joined by breaches of Reg BI, Gana said.

“Most claims are going to be brought together in most arbitrations,” he said.