Following an initial transition period, the Securities and Exchange Commission plans to increase its examination efforts to determine whether firms are complying with its Regulation Best Interest.
“Division staff has assessed the results of its initial Regulation Best Interest examinations and now that approximately six months have passed since the Regulation Best Interest compliance date, the Division intends to begin its next phase by conducting more focused examinations … beginning in January 2021,” the SEC’s Division of Examinations Staff notes in a Dec. 21 statement. As part of this effort, Division says that it will examine whether broker-dealers have written policies and procedures and systems in place to achieve compliance with the regulation.
Prior to Reg BI’s June 30, 2020 compliance date, the Division—which was previously known as the Office of Compliance Inspections and Examinations—published a risk alert to provide the industry with advance information about the expected scope and content of the initial examinations for compliance with Reg BI. In that risk alert, the Division described how it would focus on assessing whether firms have made a good faith effort to comply.
After the initial compliance deadline passed, the Division then launched preliminary examinations to assess the Reg BI implementation efforts of broker-dealers. Subsequently, the Commission staff in October 2020 hosted a roundtable discussion on Reg BI and Form CRS to highlight the staff’s preliminary observations from the examinations conducted to date.
Building on those assessments, the Division says that it intends to expand the scope of examinations that focus on specific requirements, including those that go beyond suitability standards and require broker-dealers to have a reasonable basis to believe that recommendations are in a customers’ best interests.
Exam Focus Areas
According to the SEC’s statement, areas that may be the subject of focus during an examination include:
- Continued evaluation of firm policies and procedures, including evaluating specific firm processes for regulatory compliance and alterations to firm product offerings, including the removal of higher cost products when lower cost products are available.
- Evaluation of how firms have considered 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 have used 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, how alternatives were considered, and what documentation was retained.
- Evaluation of the processes firm personnel have used to recommend complex products, including what information was available and used to consider reasonably available alternatives.
- Evaluation of the processes that firms have used to identify and address conflicts related to recommendations.
An additional area that came up during the October roundtable discussion and in a separate SEC statement was a reminder to firms that they must report disciplinary history on their Form CRS (customer relationship summary) 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 relationship summary.
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. “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,” the SEC emphasizes.
