SEC Regulation Best Interest (Reg BI) Exam Observations Risk Alert

On January 30, 2023, the Securities and Exchange Commission (SEC) Division of Examinations (EXAMS) issued a risk alert describing its Observations from Broker-Dealer Examinations Related to Regulation Best Interest (the Alert). The Alert highlighted common deficiencies and ineffective practices that could result in noncompliance with Reg BI.

Reg BI became effective on June 30, 2020 addressing broker-dealers’ responsibilities when making recommendations about investments and investment strategies in securities.

Among other observations, the Alert listed deficiencies in policies and procedures noted by SEC examination staff regarding the following Reg BI obligations.

Care Obligation

• Under Reg BI, registered representatives (RRs) must consider reasonably available alternatives when making recommendations in securities investments and strategies. However, some firms did not provide guidance on how RRs should address this requirement.
• Some firms failed to address how RRs should consider an investment’s cost when making a recommendation.
• The EXAMS staff also observed failures to provide guidance on how representatives should evidence that their recommendations are in a customer’s best interest.
• Some broker-dealers developed tools and systems for RRs to evaluate costs and reasonably available alternatives, but did not mandate their use, or failed to implement procedures to ensure they were being used.

Conflicts of Interest

In its examinations, the EXAMS staff noted that:

• some firms had not developed a process for identifying and addressing conflicts of interest
• some firms addressed conflicts only related to prohibited activities
• some firms relied solely on disclosures to mitigate certain conflicts of interest

Disclosure Obligation

In its reviews, the EXAMS staff noted that some firms:

• provided inadequate disclosure of conflicts related to dually registered RRs
• lacked guidance related to disclosure of conflicts related to the RRs making recommendations to customers
• permitted oral disclosures that could supplement written disclosures, but lacked guidance related to documenting such disclosures

Compliance Obligation

In this area, the EXAMS staff observed that some firms used generic policies and procedures that were not customized to their business.

Other deficiencies observed

In addition to the obligation deficiencies described above, the risk alert noted the following deficiencies in firms’ policies and procedures related to training and Reg BI compliance testing:

• Some firms did not adjust existing surveillance systems to address adherence to Reg BI in areas such as o retirement plan rollovers and IRA transfers o implicit hold recommendations o account recommendations
• Some firms retained documentation locally that could only be reviewed during a branch inspection
• Some firms’ surveillance systems did not review recommendations that customers did not accept
• Some firms trained RRs on Reg BI’s general aspects but not on what they need to do to comply with its requirements

Our recommendations

ACA recommends that broker-dealers review this alert to see whether their policies and procedures need adjustment based on the observations and recommendations outlined. Firms should also review previously released tools from the SEC and its staff, and FINRA for additional guidance related to Reg BI compliance.

• SEC dedicated page for Reg BI relevant materials
• ACA summary of SEC FAQs for Regulation Best Interest
• ACA highlights of FINRA checklist for Regulation Best Interest

How we help

We can help broker-dealers understand the compliance and operational issues presented by Reg BI as they relate to their retail business. Our consultants can assist in designing customized procedures that will detail the steps needed to address Reg BI’s requirements as they relate to your firm.

For more information about Reg BI, or to find out how we can help your firm comply, please reach out to your ACA consultant or contact us here.

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