On March 3, the SEC’s Division of Examinations (DOE) released its eighth annual publication, highlighting the 2021 examination priorities. The report outlined the key risks, trends, and priorities to improve compliance and enhance investor protection. While much of the priorities resembled last year’s report, the 28 pages serve as a healthy reminder for those functioning in the compliance and wealth management arena.

The priorities are wide-ranging with topics including climate-related risks, conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty), and risks relating to FinTech and RegTech. As a precursor to these priorities, it’s important to note that they were issued prior to Mr. Gensler’s arrival. This implies there may be shifts or changes as the SEC Chair puts his vision forward. This note will focus on the priorities that target firms impacted by Regulation Best Interest (Reg BI).

As noted in our previous blog, the DOE has outlined its intentions to expand the scope of examinations and focus on whether firms are making recommendations reasonably and in the customers’ best interests. In addition, the DOE will evaluate firms’ processes for compliance and alterations made to product offerings.

The Division will also conduct enhanced transaction testing as part of these examinations and will evaluate firm policies and procedures designed to meet additional elements of Regulation Best Interest, the recommendation of rollovers and alternatives considered, complex product recommendations, assessment of costs and reasonably available alternatives, how sales-based fees paid to broker-dealers and representatives impact recommendations, and policies and procedures regarding how broker-dealers identify and address conflicts of interest.

Examiners will continue to focus on conflicts of interest and whether required disclosures are made to investors with an emphasis on fees and expenses. The particular focus will be on revenue-sharing arrangements, direct or indirect compensation for executing transactions, and disclosure of fees. Examiners will also focus on whether firm actions match their disclosures. In particular, the DOE will direct exams on advice given to retail investors with a focus on:

• Recommendations and advice to individuals saving for retirement, seniors, teachers, and military personnel,
• Recommendations regarding account type and rollovers,
• Sales practices for product types including structured products, exchange-traded products, real estate investment trusts, private placements, annuities, digital assets, municipal and other fixed income securities, and microcap securities,
• Compliance obligations when providing retail customers access to complex strategies, and
• Firm compliance with the amended definition of accredited investor when recommending and selling certain private offerings.

Financial Technology and Innovation

In this year’s statement of priorities, the DOE went further to highlight the use of technology to facilitate compliance with regulatory requirements. In 2021, examinations will focus on the implementation and integration of RegTech in firms’ compliance programs. DOE stated that RegTech can empower firms to increase the efficiency of compliance staff, reduce manual processes, and exponentially increase transaction review capabilities.

Firms should consider the SEC examination priorities as they look to conduct their annual reviews of policies, procedures, and set their compliance priorities. Where firms observe risks in their practices, adjustments should be made before they find themselves the subject of an SEC investigation, examination, or enforcement action.

Choosing a Technology Partner to Meet Reg BI’s Care, Disclosure, and Conflicts of Interest Obligations

As firms look to modify their practices to meet the full scope of the pending SEC examinations, partnering with the right technology partner will be a key strategic decision. InvestorCOM’s compliance platform helps firms meet Reg BI’s Care, Disclosure and Conflicts of Interest obligations with confidence. For example, InvestorCOM’s PeerCompare addresses the SEC’s requirement that product recommendations include assessment of costs and reasonably available alternatives. Additionally, the record-keeping and disclosure capabilities ensure that financial professionals can demonstrate that they are acting in their client’s best interest.  The solution empowers the financial professional to act in her professional capacity while documenting her actions.

To learn more, sign up for a demo of InvestorCOM’s solution for Reg BI.

 

Tags: examinations, Reg BI, SEC