Reg BI Compliance Toolset: Will You Use a Shovel or a Keyboard?
“Really digging in.” That was the phrase used by Ms. Nekia Hackworth Jones, Esq. at the SIFMA C&L Regional Seminar in Charlotte, North Carolina to categorize how the SEC is approaching their upcoming Regulation Best Interest (Reg BI) examinations. The implication is clear – examiners are going to go beyond the cursory review of a firm’s policies and procedures and get more in-depth. We are two years into Reg BI, so this should be expected. But the fact that this was discussed during the seminar is very telling and serves to put us all on notice.
So, what does this mean for you? It means you need to decide whether you are going to grab a shovel and start digging your way out of a paper-based, manual-intensive hole or you are going to pick up a keyboard and rely on compliance technology to help you meet your regulatory obligations. Whichever tool you select, there are six key points or priorities stemming from the SEC’s Mar 30, 2022, Staff Bulletin that the panelists provided insight on consideration of cost and reasonably available alternatives; management of conflicts of interest; disclosures; account selection; account conversions and rollovers; and effectiveness of compliance programs, testing, and training.
I’d like to focus on one of these priorities, specifically account selection.
Account Selection: The “Gotcha” that Firms Need to Watch Out For
In my opinion, account selection is the current “gotcha” that firms need to watch out for, especially firms that are dually registered. If you have a choice to recommend a fee-based or commission-based account, you must conduct your best interest analysis and prove your rationale for why you chose one over the other. This can be quite challenging when you consider the following:
- What criteria are involved in your decision tree to ultimately land on the right account selection?
- How much do you allow the client’s preferences to drive your decision?
- What is the minimum amount of information you need to analyze and collect to prove your rationale?
- Is this just a “new account opening/onboarding” exercise? Or does this apply to conversations with existing clients?
- Are you going to provide any client disclosure?
- How much of the account type selection is driven by the products you want to recommend? Will the account type create a conflict based on trading frequency or other key criteria?
If this complex analysis is being done at all, based on my experience, firms are doing it by relying on inconsistent notes and processes stored in their CRM or on some paper form that may (or may not) live in a centralized repository. Firms that fall into this camp are ultimately in a very risky position for proving their rationale during exams (avoiding any “hindsight is 20/20” mentality) AND for conducting effective supervision.
To date, the industry has been so focused on complex products, rollovers, and reasonable alternatives for product investment decisions that I think account selection has been overlooked. The fact that the SEC is calling it out in their Staff Bulletin tells me that they think similarly. If it’s important to them, it needs to be a focus for the industry.
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