Navigating Regulatory Exams in the Best Interest Era

The financial industry is constantly evolving, particularly with the introduction of new regulatory requirements. In a recent InvestorCOM webinar, industry experts gathered to share their insights on navigating regulatory exams in the context of the Best Interest (BI) era. This panel explored recent enforcement trends, compliance strategies, and the importance of adapting to the changing regulatory environment.

 

Best Interest Era and Its Challenges

The Reg BI framework has placed a heightened responsibility on financial institutions and advisors to ensure that the products and services they recommend are truly in their clients’ best interests. This shift has introduced new layers of complexity for compliance professionals, particularly as they navigate exams and enforcement activities from regulators such as FINRA and the SEC.

The panel highlighted that, although many firms have adjusted their processes to meet basic BI requirements, there is now a growing emphasis on more substantive issues. Regulatory bodies are evolving their approach from merely ensuring that firms have BI compliance programs in place to scrutinizing the quality of recommendations, particularly around complex products, higher-cost investments, and rollover advice.

 

Documentation: A Key Focus for Compliance

One of the most important takeaways from the discussion was the critical role of documentation in compliance. As Ed Wegener, Practice Lead at Oyster Consulting, pointed out, “Regulators have always emphasized documentation. Firms need to ensure they have solid documentation to support every recommendation made to clients.”

Panelists agreed that one of the easiest ways for firms to trip up in an exam is by failing to document decisions adequately. Simple oversights, like missing records of why a higher-cost product was recommended over a more affordable alternative, can lead to serious regulatory action. Regulatory bodies are particularly focused on complex products such as L bonds, structured notes, and alternative investments, areas where clear documentation is essential.

Furthermore, the panel emphasized that regulators have shifted from looking at low-hanging fruit—like ensuring that firms have basic BI disclosures—to examining deeper, more nuanced compliance areas. This includes making sure that firms are conducting comprehensive evaluations of reasonably available alternatives and documenting their processes to mitigate risk.

 

Leveraging Technology for Better Compliance

With the growing complexity of regulatory exams, the panel also discussed the value of leveraging technology to enhance compliance. Randy Barnes, Director of Product Development at InvestorCom, emphasized the need for firms to adopt digital solutions to streamline their compliance processes. He explained that technology can help firms not only manage their documentation more effectively but also provide real-time oversight and auditing capabilities.

Barnes shared how digital platforms can standardize compliance practices across a firm, ensuring that every advisor follows the same procedures and submits required documentation consistently. This is especially important for firms with multiple branches or independent advisors, where maintaining consistency can be a challenge.

The benefits of digitization extend beyond improved efficiency. As Mitch Atkins, Founder and Principal of FirstMark Regulatory Solutions,, noted, “A manual process opens the door to inconsistencies and errors. In contrast, digital solutions can guide financial advisors through a structured compliance process, ensuring that all necessary steps are taken and documented.”

 

Best Practices for Navigating Exams

The experts shared several best practices for firms to consider as they navigate the BI regulatory landscape:

1. Start at the Top: Recommendations should begin with a thorough assessment of the client’s needs, followed by an analysis of which products—such as mutual funds, variable annuities, or individual stocks—are best suited for them. The process should include documenting both the product recommendation and the rationale behind it.
2. Avoid “Check the Box” Compliance: Regulators are increasingly wary of firms that rely on basic checklists to meet compliance standards. Firms should ensure that their processes allow for detailed documentation, including explanations of why a particular product was recommended over others.
3. Be Prepared for Scrutiny: Regulators are focusing on account type recommendations and whether firms are making proper assessments when switching clients from commission-based accounts to fee-based ones. Rollovers, particularly IRA rollovers, are also under significant regulatory focus.
4. Train and Educate Advisors: Continuous training is essential to ensure that financial advisors are aware of the latest regulatory requirements and understand how to document their recommendations properly. Firms should also ensure that their compliance staff is well-equipped to supervise and audit the process effectively.

 

Staying Ahead of Regulatory Changes

The conversation concluded with a discussion on how firms can stay ahead of regulatory changes. As the BI landscape continues to evolve, firms must be proactive in adopting best practices and leveraging technology to mitigate compliance risks. With regulators placing increasing scrutiny on firms’ processes, maintaining robust documentation and implementing efficient compliance systems will be key to avoiding regulatory pitfalls.

Ultimately, the panel emphasized that firms should not wait for enforcement actions to ramp up before making changes. By adopting a proactive approach to compliance and embracing digital solutions, firms can position themselves to thrive in this new era of regulatory oversight.

 

Conclusion

The regulatory landscape surrounding BI is becoming more complex, but with the right tools and strategies, firms can navigate these challenges successfully. By focusing on thorough documentation, leveraging technology, and preparing for deeper scrutiny, financial institutions can not only meet regulatory expectations but also ensure that they are truly acting in the best interests of their clients.

Tags: Reg BI, Webinar