With more than six months since the Regulation Best Interest (Reg BI) compliance deadline, a heightened sense of anticipation is brewing around what wealth firms should expect in 2021. In retrospect, the Reg BI journey thus far has been riddled with uncertainty around what steps broker-dealers (B-Ds) needed to take to ensure compliance.

During this period, some firms approached Reg BI compliance more proactively and relied on steps taken during the Department of Labor’s (DOL) fiduciary period. Conversely, other firms took a more cautionary approach and followed the Security and Exchange Commission’s (SEC) expectations, albeit in a good faith manner. Neither one was an unreasonable approach considering the range of uncertainties firms were facing, including a potential change in the political environment, the relative infancy of the regulations and the lack of regulatory enforcement actions.

In 2021, a new political administration and new SEC chair are expected to usher in much-needed clarity around the areas that firms will need to act on. Tougher expectations stemming from the SEC’s expanded scope for Reg BI examinations in 2021 and new enforcement cases will provide compelling points of reference. In short, it is anticipated that 2021 will be the year when action will be required.

Reg BI Examinations – What to Expect in 2021

Prior to the Reg BI deadline of June 30, 2020, the SEC’s risk alert alleviated compliance anxiety by outlining that examinations would focus on whether firms had made good faith efforts to comply with substantive elements of Reg BI.

Following the June 30, 2020 deadline, the SEC launched examinations to assess implementation efforts. On October 26, 2020, the SEC and FINRA hosted a roundtable to share observations based on the preliminary examinations.

With the initial examinations complete, the SEC intends to begin 2021 with the next phase of exams. On December 21, 2020, the SEC announced that it will expand the scope of Reg BI examinations in 2021, with a focus on specific requirements of the regulation, including those that “go beyond suitability standards and require broker-dealers to have a reasonable basis to believe that recommendations are in retail customers’ best interests.”

In addition to a continued evaluation of firm policies and procedures, the examination will also include a detailed assessment of how firms:

1. Consider costs when making a recommendation, including:
   • Information available to identify relevant costs and how cost information was used, and
   • any documentation of the consideration of costs.
2. Recommend complex products, including what information was available and was used to consider reasonably available alternatives.
3. Identify and address conflicts related to recommendations.
4. Make recommendations to new customers. For example, if a firm recommended a rollover from an employee benefit plan, examiners will assess what information was gathered from new customers; what disclosures were made at the time; how alternatives were considered; and what documentation was retained.

 

Reg BI Enforcement Is on the Horizon

Given the relative infancy of Reg BI, the wealth management community has seen limited direct enforcement actions from the regulators. This void of case precedent does not provide firms with a concrete picture of compliance priorities. However, there is a good chance this may change in 2021, which would lead to a sense of urgency in taking preventative measures.

Market experts believe that stricter SEC enforcement is on the horizon, especially under the new administration. The nomination of Gary Gensler as the new SEC chair has further cemented expectations of stronger regulation and enforcement actions to come. Pundits have commented that “the sheriff is coming” and they are counting on Gensler to boost enforcement and fines for financial firms and executives accused of wrongdoing. Moreover, if the recent enforcement actions and resulting large settlements serve as any indication, firms will need to make it a priority to address conflicted investment recommendations and increase disclosure and documentation – the very same principles that Reg BI aims to address.

Are You Ready to Go Beyond Good Faith?

With the period of “good faith” compliance behind us and the SEC’s 2021 examination on the horizon, the next 12 months will surely turn up the compliance heat on many firms. To receive a passing grade under the SEC’s lens, firms will need to prioritize two key areas of implementation:

1. Incorporating Reg BI into their Policies and Procedures ManualFirms that may have neglected to update their process and procedures manual will need to prioritize amending this document to ensure it aligns with the spirit of Reg BI. Given the SEC’s October 26 commentary on general compliance gaps, the specific area of focus will bed key components of the Care Obligation.
2. Assessing Costs, Available Alternatives and Conflicts

To avoid regulatory scrutiny, compliance teams will need to steer away from voluntary and undocumented processes that rely on self-certified compliance practices. Going forward, a compliant practice will be centered on a consistent process that is supported by clear documentation. Given the SEC’s examination focus, B-Ds should empower their financial professionals to assess:

• All relevant cost information
• Reasonably available alternatives
• Any risk of conflicts in the recommendation process

The Role of Technology

As firms look to modify their practices to meet the specific requirements of Reg BI and pass the pending examination expectations, partnering with the right technology partners will be a critical. Given the breadth of existing technology solutions, the ideal partner will provide intuitive tools that support a financial professional’s best interest recommendation process while seamlessly integrating into existing workflows.

InvestorCOM PeerCompare documents key aspects of a financial professional’s product recommendation process, including an assessment of costs, and reasonably available alternatives, exposing potential conflicts in the process. In essence, this solution allows an advisor to act in her professional capacity while comparing and documenting costs, alternatives and conflicts, ensuring that her actions meet Reg BI and firm compliance guidelines.

Contact us to learn more about PeerCompare or to schedule a demonstration.

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By Parham Nasseri, vice president, regulatory strategy at InvestorCOM Inc.

Parham Nasseri has over a decade of wealth management and regulatory experience. He is the Chair of the Canadian Advocacy Council of CFA Societies Canada and previously held roles at the Ombudsman for Banking Services and Investments and the Brattle Group. Mr. Nasseri is a CFA Charterholder and has an MBA from Schulich School of Business.

Tags: examinations, reasonably available alternatives, Reg BI, SEC