Reg BI Violations Result in $325k Charge for Broker Dealer
SEC RELEASES
Introduction
The SEC announced charges against a Broker Dealer on September 18th, 2024, for violations pertaining to Regulation Best Interest (“Reg BI”).
Broker Dealers are required to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
Due to alleged failures to comply with the regulation, the Firm was charged $325,000 in penalties.
What Happened?
- Relating to structured note recommendations, the Firm’s policies and procedures required Registered Representatives to:
- Determine whether the customer’s investment profile met Firm requirements;
- Determine whether the resulting customer holdings would not exceed the Firm’s concentration limit for that product type in the brokerage account;
- Submit customer-signed structured note disclosures; and
- Submit customer-signed letters when the customer liquidated holdings in certain products and used those Funds to purchase a structured note.
- Firm policies also required that its Principal Review Desk (PRD) review structured note recommendations to ensure compliance.
- Initially the PRD reviewed transactions after execution, and if anything was out of compliance a report was created and the representative had a 60-day grace period to provide the necessary documentation.
- After February 2023, the procedures were changed so the PRD needed to review transactions prior to execution.
- For over a year following a merger with another Firm, the Broker Dealer failed to enforce the Reg BI procedures for acquired customer accounts and any new registered representatives servicing the accounts.
- New Representatives did not have access to the reporting site that would let them know they were out of compliance and needed to provide documentation.
- The Firm did not have accurate customer investment profile information in its systems that would allow the PRD to review transactions properly.
- At least several hundred structured note recommendations did not comply with Firm policies and procedures.
Vigilant’s Conclusion
Reg BI can be expected to be a major source of enforcement action for Broker Dealers as regulators look to protect investors.
Firms have faced significant fines for failing to comply.
It is vital that Firms implement proper procedures, train employees at least annually, limit compensation models for employees that can create conflicts of interest and ensure that policies and procedures are actually enforced by Supervising Principals.
If you have any questions related to this enforcement, please reach out to Vigilant today.