SEC Issues Risk Alert Related to Regulation Best Interest
SEC Releases
Brief Introduction
The SEC’s Regulation Best Interest deadline passed on June 30th, 2020. Under this regulation, there has been an enhancement of the expectations for Broker-Dealers when making recommendations to retail customers. After multiple firm examinations, the SEC has made this release to highlight deficiencies and weaknesses they have noted.
This risk alert affects Broker-Dealers and any other financial professional that makes recommendations involving securities to retail customers.
3 Key Observations During Examinations
- Firms did not have adequate written policies and procedures required to comply with Regulation BI, and many used generic policies that were not tailored to their business model.
- Deficiencies for Disclosure Obligations
- Firms did not specify in their policies:
- When disclosures needed to be created or updated.
- How updated disclosures should be delivered to retail customers.
- Which parties are responsible for updating and disseminating disclosures.
- Firms did not have a process for ensuring that disclosures were provided to retail customers prior to or at the time of recommendation.
- Firms did not specify in their policies:
- Deficiencies for Care Obligations
- Employees were instructed to consider available alternatives and costs to the clients without providing guidance on how to do so.
- There were situations where financial professionals had no supervisory review to ensure that systems created for evaluation of costs were used.
- Financial professionals were expected to document their basis for recommendations without guidance for when, how, or what was expected in the descriptions.
- Deficiencies in Training and Periodic Testing
- Firms relied on surveillance policies created before the Regulation BI implementation, and there were little or no modifications made after the effective date.
- Documentation for review was maintained locally instead of centrally, reducing the ability of central compliance departments to perform frequent reviews.
- Only executed transactions were monitored for compliance, ignoring recommendations made to retail customers that were declined.
- Employee training made reference to Regulation Best Interest but did not address how employees were to remain compliant using company policies and procedures.
- Deficiencies for Disclosure Obligations
- Firms lacked proper Policies and Procedures related to Conflicts of Interest Obligations
- Written Procedures
- No written policies or procedures designed to specify how conflicts could be identified or addressed.
- No prohibitions on sales contests, quotas, bonuses, and other compensations based on sales of specific securities or types of securities.
- Identification of Conflicts
- Definition of “conflict of interest” limited to obviously prohibited activities.
- Generic language used that lacked specificity or applicability.
- Failure to Mitigate
- Firms relied on the disclosure of conflicts of interest without any attempts to mitigate them.
- Identification and mitigation of potential conflicts are required under the Conflict-of-Interest Obligation.
- Written Procedures
- Firms failed to provide proper disclosures to Retail Customers.
- Firms only posted disclosures online or in other documents, not directly to the retail customer.
- Registered Representatives in Multiple Roles
- Firms failed to design Policies and Procedures ensuring that professionals with multiple licenses were disclosing to retail customers what their specific role was to them.
- Firms failed to establish Policies and Procedures requiring professionals to disclose additional information beyond standard disclosures when their multiple capabilities could create a perceived conflict of interest. Firms lacked proper policies and procedures related to Conflicts of Interest Obligations.
Vigilant’s Final Conclusion
The SEC recommends that all firms evaluate and modify their practices, policies, and procedures to comply with Regulation Best Interest. Relying on outdated and generic compliance processes greatly increases the risk of regulatory burden and can create major headaches if regulators perform an examination.
In an increasingly aggressive regulatory environment, it is essential that firms have compliance support to make sure their processes are up to date with the current regulatory requirements.
Vigilant brings decades of compliance experience and leverages in-depth industry experience to support your business in reaching its goals while remaining compliant. Please reach out to us if you have any questions or concerns about this Risk Alert, and how it could affect your firm.