Regulation Best Interest (Reg BI) came into effect on June 30, 2020. Since then, FINRA and the SEC’s Division of Examinations have been reviewing firms’ implementation and compliance practices throughout 2021–2022.  

This summary reviews FINRA’s 2023 exam and risk monitoring report and the SEC’s Risk Alert on Reg BI “Observations from Broker-Dealer Examinations Related to Regulation Best Interest” (published January 30, 2023) to assist firms that are looking to enhance their Care Obligation compliance policies and practices. 

FINRA’s 2023 Exam Report 

Care Obligation: Exercising reasonable diligence, care and skill to:  

• understand the risks, rewards and costs associated with the recommendation;  
• form a reasonable basis that the recommendation is in the best interest of customers;  
• obtaining and analyzing information about the retail customer’s investment profile; and  
• considering a sufficient array of reasonably available alternatives, including lower cost or lower risk alternatives, if any, your firm offers?  
• is there heightened scrutiny around high-risk, high-cost, complex or high conflict of interest investments?  
• for account type recommendations, does your firm: 

a. establish an understanding of the characteristics of the account by considering:  

• • • services and products provided in the account (including ancillary services provided in conjunction with an account type, such as account monitoring services);  
    • alternative account types available; 
    • whether the account offers the services requested by the investor; and  
    • whether these factors are consistent with the retail customer’s investment profile and stated investment goals?  
    • consider the projected costs of the recommended account, including, for example, account fees (e.g., asset-based, engagement, hourly), commissions and transaction costs (e.g., markups and markdowns), tax considerations, as well as indirect costs
      

b. When making rollover or account transfer recommendations  

• • • ensure there is a reasonable basis for the rollover or transfer itself,  

• • • the account type being recommended, and any securities or investment strategies recommended are in the retail customer’s best interest 

• • • Do you consider, factors potentially relevant to rollovers or transfers, such as:  

1. 1. 1. 1. costs (e.g., costs associated with closing out securities, if the customer has to sell them as a result of the recommendation to transfer),  
         2. level of services available,  
         3. features of the existing account,  
         4. available investment options,  
         5. ability to take penalty-free withdrawals,  
         6. application of required minimum distributions, 
         7. protection from creditors and legal judgments,  
         8. and holdings of employer stock? 

For those wondering whether they need to document their recommendations, FINRA provided much-needed clarity around their expectations.  

“Has your firm considered how it will demonstrate (via documentation or otherwise) that it has met its obligations with respect to the basis for recommendations, particularly, though not exclusively:  

• recommendations of account types;  
• recommendations of complex, risky, or illiquid securities; or  
• recommendations that appear inconsistent with a retail customer’s investment profile?” 

 

SEC 2023 Risk Alert 

The risk alert highlights deficiencies noted during examinations conducted. The SEC highlighted specific areas where some firms did not have written policies and procedures reasonably designed to achieve compliance by their financial professionals with the Care Obligation. Examples of policies and procedures include policies and procedures that:  

• directed financial professionals to consider reasonably available alternatives without providing any guidance as to how to do so (e.g., by establishing the scope of alternatives to consider or systems to use for considering reasonably available alternatives in formulating a recommendation). 
• directed financial professionals to consider costs without providing any guidance as to how to do so (e.g., how to consider costs when making a recommendation, what types of costs to consider, including direct and indirect costs, or what systems to use to analyze costs in formulating a recommendation).  
• created systems that allowed financial professionals to evaluate costs or reasonably available alternatives but did not mandate their use (or, in some instances, firms could not determine whether or not financial professionals used the systems.  
• where firms did not mandate use of systems, the firm could not enforce its policies and procedures that required financial professionals to consider costs and reasonably available alternatives when making recommendations.  
• directed financial professionals to document the basis for their recommendations but not when documentation is necessary or appropriate or the specific information to be gathered,  

When adopting Regulation Best Interest the Commission noted examples of policies and procedures that may contain deficiencies, including those that: 

• Relied on surveillance systems that existed before the effective date of Regulation Best Interest without considering whether those systems needed modification. For example, firms did not consider whether existing surveillance systems were reasonably designed to prevent violations from occurring as it relates to recommendations of rollovers, account recommendations, and implicit hold recommendations.  
• Relied on documentation maintained locally, rather than in a central location,  
• Relied on surveillance systems that captured only executed transactions to monitor for compliance with Regulation Best Interest. These systems did not capture hold recommendations or recommendations that are not accepted by the retail customer and, as a result, firms were unable to review such recommendations for compliance with the rule.  

• Employee Training. Some firms offered employee training that included information on Regulation Best Interest but did not identify the firms’ processes for compliance with Regulation Best Interest. 

 

 

Care Obligation Compliance Technology  

As firms review FINRA and the SEC’s findings, many are opting to deploy intuitive, purpose-built technology to empower financial professionals and their compliance teams. The right technology can enhance a financial professional’s recommendation workflow. For instance, instead of “guessing” which products to compare, financial professionals can use a peer-oriented, technology-based framework to consistently compare the cost, risk and return of an investment against an entire group of reasonably available alternatives. 

Find out what financial professionals think about using InvestorCOM PeerCompare to make compliant product recommendations.

 

Automation has been key  to streamlining these processes, enabling software solutions that document recommendations at the time of the comparison, not after. Rob Dearman, CEO and Chief Innovation Officer of DCG Insight, has said, “the use of a purpose-built compliance platform specifically designed for making compliant recommendations, documentation and reporting allows broker-dealers to meet the many facets of their best interest obligations with minimal training time, intuitive programming, and easy implementation.  

 

A recent InvestorCOM client case study measures the success of Reg BI technology over a two-year period on meeting regulatory goals and driving better financial decisions. 

 

Contact us to discuss how purpose-built compliance technology can help your firm meet Reg BI’s Care Obligation.