Reg BI’s Care Obligation Under Scrutiny by SEC
On March 3, 2021, the US Securities and Exchange Commission (SEC) Division of Examinations announced its examination priorities including a greater focus on Regulation Best Interest (Reg BI). Reports from October 2021 suggest the SEC is making good on its promise by sending a large number of broker-dealers Reg BI exam deficiency letters.
Reg BI came into effect in June 2020 and requires broker-dealers to ensure that recommendations are not only suitable but in the client’s best interest. It appears that the main Reg BI deficiencies identified by examiners include a failure by firms and financial professionals to consider reasonably available alternative investments and a failure to implement processes and procedures to identify and address conflicts of interest.
On October 6, 2021, SEC Director of Enforcement Gurbir Grewal, strongly encouraged firms to take a more proactive approach to Reg BI by giving their representatives “the tools and information that will enable them to identify, disclose, and mitigate conflicts prohibited under Reg BI.” Grewal also highlighted the risks to broker-dealers and financial professionals of using personal devices to communicate trade-related information since these records may be difficult to produce in the event of a regulatory exam or investigation. Grewal added that, “recordkeeping violations may not grab the headlines, but the underlying obligations are essential to market integrity and enforcement.”
NASAA Reg BI Research Report Indicates Gaps
The following month, the North American Securities Administrators Association (NASAA) published a report stating that the majority of broker-dealers continue to put their financial interests ahead of their customers. NASAA found some improvements but said that “most firms are operating in the same manner as they were under the suitability rule, especially when it comes to harmful compensation conflicts”. Furthermore, 65% of broker-dealer firms reported not discussing lower-cost, lower-risk products with their customers when recommending investments.
Compliance Priority for Reg BI
As the regulators ramp up their examinations in the coming months, broker-dealers must be responsive to their enhanced regulatory obligations under Reg BI. They must ensure they have effective systems in place to allow their financial professionals to identify reasonable available alternatives (RAA) when making recommendations. But this process does not need to be cumbersome. InvestorCOM’s purpose-built compliance platform provides compliance teams and financial professionals the means to simplify this process.
- InvestorCOM PeerCompare enables financial professionals to make best interest recommendations by comparing an investment recommendation to a reasonable range of alternatives on the firm’s product shelf considering factors such as cost, risk and return characteristics of the investment.
- InvestorCOM ShelfMonitor helps compliance teams stay on top of all changes to investments on their product shelf either by searching for updates or using customized alerts. InvestorCOM’s proprietary Materiality Score allows compliance teams to easily identify the most significant changes.
- InvestorCOM ShelfAnalyzer enables compliance and product teams to easily assess the competitiveness of their existing product shelf and identify new products to add or remove. InvestorCOM’s proprietary Peer Rating system and other firm-selected criteria to makes it easy to evaluate product competitiveness efficiently and without bias.