$201K Reg BI Enforcement Action: Lessons for Firms
SEC Releases
Introduction
The SEC charged a New York based Broker Dealer with failing to comply with Regulation Best Interest (“Reg BI”) in connection with Mutual Fund recommendations and the Firm’s investment planning practices.
According to the SEC, the Firm recommended certain Mutual Fund switches that caused retail customers to incur unnecessary upfront sales charges and failed to maintain adequate written policies and procedures designed to achieve compliance with Reg BI.
We have provided key takeaways from this Reg BI violation that can be found below.
Key Takeaways
- The SEC found that from 2020 through 2024, the Firm recommended customers sell Class A Mutual Fund shares held for less than one year and purchase new Class A shares in different Fund families, resulting in additional upfront sales charges to customers.
- The SEC stated that the Firm failed to adequately consider customer costs and available alternatives, including lower-cost switching options within the same Mutual Fund family.
- The SEC also found that the Firm failed to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI related to its customized investment plans.
- As part of the settlement, the Firm agreed to pay approximately $201,600, consisting of disgorgement, prejudgment interest, and a civil penalty.
Vigilant’s Conclusion
This matter serves as an important reminder that Firms must consistently place retail customers’ interests ahead of financial incentives when making investment recommendations.
Firms should maintain strong supervisory systems, document cost considerations and alternatives, and regularly review and update Reg BI policies and procedures to ensure recommendations are aligned with clients’ best interests and regulatory expectations.