The SEC’s Division of Examinations (formerly known as the Office of Compliance Inspections and Examinations, or OCIE) released a statement of its plans to expand 2021 Regulation Best Interest examinations of broker-dealers to go beyond “good faith efforts” to comply and focus on specific rule requirements, including alterations to product offerings, consideration of costs in making a recommendation, rollovers, complex products and reasonably available alternatives, processes to identify and address conflicts, and appropriate written policies and procedures.
Reg BI established a new standard of conduct for broker-dealers under the Exchange Act. After the June 30, 2020 compliance date, the Division launched initial examinations to assess broker-dealers’ good faith implementation efforts (see original risk alert here). Preliminary observations from the initial examinations were discussed by the Division, the Commission’s Division of Trading and Markets, and FINRA staff at a Roundtable on Reg BI and Form CRS (customer relationship summary) in October 2020 (see press release here).
Division staff will now begin its next phase of examinations (see public statement here). The examinations’ expanded scope will include focusing on requirements that go beyond suitability standards and require broker-dealers to have a reasonable basis to believe recommendations are in customers’ best interests, and enhanced transaction testing designed to examine whether broker-dealers have effectively implemented their written policies and procedures. The SEC emphasized that “Failure to have adequate written policies and procedures and failure to have adequate supervisory and compliance oversight may indicate recurring issues in complying with Regulation Best Interest.”
Exam Focus Areas:
- Evaluation of firm policies and procedures, including specific firm processes for compliance with the Regulation, and alterations to firm product offerings, including the removal of higher cost products when lower cost products are available.
- Evaluation of how firms consider costs in making a recommendation, which may include:
- what information is available to firm personnel to identify relevant costs;
- how any such information has been used; and
- any documentation of the consideration of costs.
- Evaluation of the processes firm personnel use to make recommendations to new customers – for example, if a firm recommended a rollover from an employee benefit plan, examiners will assess:
- what information was gathered from new customers;
- what disclosures were made at the time; and
- how alternatives were considered; and what documentation was retained.
- Evaluation of the processes firm personnel use to recommend complex products, including what information was available and used to consider reasonably available alternatives.
- Evaluation of the processes firms use to identify and address conflicts related to recommendations.
An additional reminder during the roundtable discussion was to report disciplinary history on Form CRS if that history must also be reported on other forms. The SEC noted that firms do not have discretion to leave the answer blank or to omit reportable disciplinary history from the CRS.
Going forward, the Division encourages firms to continue to evaluate their processes and, in particular, to consider whether the programs adopted prior to the June 30 compliance date are, in practice, reasonably designed to achieve compliance.
Michael Best’s Securities & Capital Markets team has experts who advise broker-dealers on compliance with SEC rules and regulations, including compliance with Regulation Best Interest. Please do not hesitate to contact the authors of this article or your Michael Best attorney for additional guidance and information.