SEC Examinations that Focus on Compliance with Regulation Best Interest
The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert to provide broker-dealers with information about the scope and content of its initial examinations for compliance with Regulation Best Interest (Reg BI). For additional information about the requirements of Reg BI, please see our blog entitled SEC Adopts Reg BI.
After the June 30, 2020 compliance date, the OCIE staff will begin examinations that will focus on assessing whether firms have made a good faith effort to implement policies and procedures that are reasonably designed to comply with Reg BI, including the operational effectiveness of those policies and procedures. Examples of areas the staff may focus include:
The staff may assess how a firm has met the Disclosure Obligation’s requirement to disclose material facts relating to the scope and terms of its relationship with retail customers, including: (i) the capacity in which the recommendation is made, (ii) material fees and costs that apply to the customer’s transactions, holdings and accounts, and (iii) material limitations on the securities or investment strategies that may be recommended. The staff may review documents such as:
- schedules of fees and charges assessed against retail customers and disclosures regarding those fees and charges;
- the broker-dealer’s compensation methods for registered personnel, including sources and types of compensation and related conflicts of interest;
- disclosures related to monitoring of customer accounts;
- disclosures regarding material limitations on accounts or services recommended to customers; and
- lists of proprietary products sold to customers.
To assess compliance with this obligation, the staff may review:
- information collected from customers to develop investor profiles;
- the broker-dealer’s process for having a reasonable basis to believe that recommendations are in the best interest of the customer;
- how the broker-dealer makes recommendations related to significant investment decisions, such as rollovers and account recommendations; and
- how the broker-dealer makes recommendations related to more complex, risky or expensive products and how the broker-dealer has a reasonable basis to believe that such products are in a customer’s best interest.
Conflict of Interest Obligation
To assess compliance with this obligation, the staff may review the broker-dealer’s policies and procedures to determine whether and how they address the following:
- conflicts that create an incentive to place an associated person’s interest ahead of the customer’s interest;
- conflicts associated with material limitations on the products or strategies that may be recommended;
- the elimination of prohibited sales contests;
- the identification of conflicts that the broker-dealer or its associated persons may face;
- the assessment of how the broker-dealer should mitigate, manage or eliminate conflicts; and
- the identification of conflicts that must be disclosed.
To assess compliance with this obligation, the staff may review the broker-dealer’s policies and procedures and evaluate controls, remediation of non-compliance, training, and periodic review and testing included as part of those policies and procedures.
OCIE encourages firms to assess their implementation plans for Reg BI compliance. To assist firms with this, the Risk Alert includes an Appendix that displays a sample request for information and documents to be reviewed during these examinations.
Oyster Consulting has the knowledge and experience to support your efforts to comply with Reg BI. To receive assistance with the preparation of policies and procedures or disclosure documents, or to receive training to ensure you understand the impact of the Reg BI requirements, click here or call (804) 965-5400 and we will put you in touch with our experts.
About the Author: Bob has over 25 years of experience in the financial services industry. He has served as in-house counsel for Nationwide Financial Services, Inc., an affiliate of Nationwide Insurance Company, and BISYS Fund Services, a mutual fund administrator and product distributor. At Nationwide, he managed a practice group that supported Nationwide-affiliated broker-dealers and provided legal support for Nationwide insurance agents. At BISYS, he provided legal support for BISYS mutual fund clients, including the preparation and review of mutual fund registration statements, the review of advertising and sales literature and the preparation of board meeting agendas, resolutions and minutes. Prior to serving in these in-house counsel roles, Bob held the position of Attorney Adviser in the Investment Management Division of the SEC.