SEC Staff Bulletins and Risk Alerts: Reg BI

Recently, InvestorCOM spoke with Jim Sommerfield from Wintrust Wealth Management, Issa Hanna from Eversheds Sutherland, and Richard L Chen from Richard L Chen PLLC to discuss the SEC’s guidance on reasonably available alternatives for advisors and broker-dealers.

Parham Nasseri [PN]: Let’s start with the SEC’s March 2022 Bulletin around account type recommendations. In this particular guidance note, the SEC sets very clear expectations around account type recommendations specifically for dually registered advisors. Richard, what do you make of this particular bulletin?

Richard Chen [RC]: I think what the SEC was trying to convey is that when looking at the Care Obligations, it’s important not only to look at individual strategies but also account types, particularly with respect to dually registered firms and representatives. And looking at whether or not those account types are suitable, so whether it’s a brokerage account or advisory account, whether it’s a rep versus a non-rep account or whether you’re talking about retirement plan accounts or retirement account sort of rollovers, it’s important to look at the account type and to think about what services and products are offered under those account types, what are the client’s needs with respect to services their preferences, and also what are the alternatives.

I think that there are a few important takeaways from this Staff Bulletin that are notable. One is if a firm doesn’t have sufficient information about the individual needs and preferences of the client they cannot make recommendations, and this is sort of notable with respect to the retirement plan rollovers. But also, it’s important that the Staff noted that it is important, not only to look at the preferences of the individual clients, but also what their needs are and to make an appropriate recommendation, not purely based on the preferences of those clients. With respect to dually registered advisors, they think it was also noted that the advisors should make clear the capacity in which they’re making the recommendation – whether it’s in a brokerage rep capacity or advisor rep capacity, and also to make clear any conflicts and to disclose those conflicts to clients when making those account type recommendations.

[PN]: There’s a continuum of SEC Staff Bulletins or Risk Bulletins that have come out. The next guidance note was around the deficiencies surrounding compliance with the Care Obligation. Issa, the SEC’s January 30th Reg BI Risk Alert brings to light a few concrete compliance deficiencies. From your perspective, what are they, and what stands out to you the most?

Issa Hanna [IH]: That risk alert was fairly comprehensive from the perspective of Reg BI. It didn’t just touch upon the Care Obligation, it also addressed commonly observed deficiencies and best practices in connection with other aspects of Reg BI like the Conflict of Interest Obligation, the Disclosure Obligation, and the Compliance Obligation. Given that the focus of today’s discussion is really around the Care Obligation for broker-dealers and advisors,  I think it’s worth calling out a few items under that Risk Alert just to kind of paint the overall picture.

SEC Risk Alert Deficiencies

Figure 1: SEC Risk Alert Deficiencies


The Staff and Division of Exams in this Risk Alert said as part of some examinations and review of firm practices they picked up on common weak points with respect to policies and procedures that are designed to comply with the Care Obligation. They provided some examples.

  • First, they picked up on certain policies & procedures that directed financial professionals in general to consider reasonably available alternatives (RAA) but did not provide any guidance as to how they should go about that process. For example, they thought that firms should be more specific about establishing the scope of alternatives to consider in certain circumstances, or the systems to use for considering RAA in formulating a recommendation.
  • They also picked up on policies & procedures that were weak and that they directed financial professionals to consider costs, without providing them any guidance as to how to do so. For example, they thought that firms should be more specific about which specific types of costs to consider, including both direct and indirect costs, or what systems to use to analyze costs in formulating a recommendation.
  • They saw that firms created systems, whether manual or a technology-based system that allowed financial professionals to evaluate costs or RAA, but they didn’t see firms mandating their use. Or maybe they mandated, but they didn’t have a process to determine if they were being used. That’s something that the Staff views as important because if you don’t mandate their use, in their view, it’s hard to establish that you are enforcing your policies & procedures requiring those financial professionals to consider costs and RAA.
  • Finally, they picked up on some firms that directed in their policies & procedures of financial professionals to document the basis for recommendations but didn’t give them instructions as to when documentation would be necessary or appropriate, or the specific information to be gathered.

As I said, there’s a lot more to it than just the Care Obligation, but those are I think the main takeaways.


Investment Recommendations Workflow

Figure 2: InvestorCOM’s Investment Recommendation and Disclosure Workflow Model


[PN]: Jim, given what Issa just shared, and given your vantage point as a practitioner, you see this statement that highlights the deficiencies. The one specific piece that we’ve seen the SEC call out specifically is implementing systems, but not requiring documentation specifically. As a practitioner, how do you combat this and mitigate that risk?

Jim Somerfield [JS]: I think at the end of the day, it starts with policies & procedures. What was the alert focused on? Poor policies & procedures, lack of detail, lack of specifics in terms of who’s responsible for what and who’s taking care of what. I can tell you that as a dual registrant at Wintrust, we focused on developing good policies & procedures that are manageable and that make sense. Obviously, any procedure you put together you want to make sure you’re doing what you say you’re doing. There’s nothing worse than creating this grand procedure and not being able to follow through on it. It’s just a recipe for getting cited during an exam.

What we’ve done is we’ve focused on clear lines of responsibility and accountability amongst our leadership team, our compliance, and our management. We leverage technology tools to ensure that we’ve met the obligations of the rule, whether it be disclosure, delivery, contact management in terms of documentation, as well as peer comparisons to ensure that we’re considering those reasonably available alternatives. As many of you know, the SEC didn’t require documentation around RAA. But the SEC’s also the same organization that says,”if it isn’t documented, it didn’t happen”, right?

My firm underwent an SEC BI exam, and we had a good number of takeaways from that. Ultimately, what we found is that having those good policies & procedures, laying out clearly who’s responsible for what, what the expectations are around our financial advisors and our financial professionals in terms of how they’re conducting their recommendations with their customers, and documenting those recommendations to ensure we’ve met our BI obligations has been critical to meeting the requirements.


If you enjoyed this article, you can listen to the full webinar discussion. Watch the Replay 2023: SEC Guidance and Reasonably Available Alternatives. 

If you would like to learn how InvestorCOM’s compliance platform is helping firms and financial professionals meet their Care Obligation requirement to assess reasonably available alternativessign up to see a demo.