Reg BI Examinations Are Coming – Are You Ready?

After investing considerable time and resources to update compliance and supervisory programs to comply with Regulation Best Interest (Reg BI), many broker-dealers are wondering what’s next.

Even if you feel comfortable with your Reg BI compliance program, you may be unsure how to sufficiently demonstrate evidence of your progress to regulators and wonder whether you’ll be able to respond to each request.

While we can only speculate on what it will take for the Financial Industry Regulatory Authority (FINRA) or the U.S. Securities and Exchange Commission (SEC) to recommend formal action in connection with violations of Reg BI or Form CRS obligations, it’s clear more robust examinations are coming.

In its 2021 examination priorities, the SEC reminded firms of its previous statements addressing what firms can expect to see in their upcoming examinations, much of which has been reiterated by FINRA. The agency issued two risk alerts that included an overview of the specific items regulators will request in connection with examinations focused on Reg BI and Form CRS. The SEC also pointed to a more recent public statement addressing recent and future examinations focused on compliance with Reg BI.

Here are some key takeaways to help you understand what to expect:

• Policies & Procedures

The SEC notably uses the word “specific” when addressing policies and procedures. Their expectation is not to read a restatement of the rule and associated obligations, rather specific processes for how a firm complies with Reg BI obligations. Although not explicitly required by the rule and not the sole factor when making a recommendation, the SEC stressed in their statement continued evaluation of alterations to a firm’s product menu “including the removal of higher cost products when lower cost products are available.”

• Consideration of Costs and Alternatives

The SEC expands on the consideration of costs and alternatives when making a recommendation. Remember, this obligation did not explicitly exist under the suitability standards, which is why we expect to see the biggest challenges in terms of incorporating these considerations into broker-dealer’s recommendations. Specifically, the SEC will expect answers to the following questions:

• • What information is available to the broker-dealer’s personnel to identify relevant costs?
  • How has such information been used?
  • Have broker-dealers documented the consideration of costs or alternatives, and if so, how?
  • What information is being gathered from new customers, such as those who were recommended to rollover assets from an employee benefit plan?

In assisting clients with Reg BI compliance, Kaufman Rossin has observed that one common pitfall for broker-dealers is not providing registered representatives with an easily accessible, approved product menu that allows comparisons of reasonably available alternatives and displays the costs and fees associated with each investment product. Alternatively, firms could provide registered representatives with a process or tool which helps to demonstrate this.

• Conflict of Interest

The SEC expects broker-dealers to provide a description of how they identify conflicts of interest (COI) and the ways in which they mitigate these to comply with the broker-dealer’s COI obligation under Reg BI. In practice, Kaufman Rossin recommends the use of a COI inventory along with a detailed description of the ways the broker-dealer mitigates that particular COI through a combination of procedures, controls, alerts, tools, forms, disclosures, and any other method that reduces the related risks.

Lastly, the SEC “encourages” firms to continue to evaluate and consider improvements to their Reg BI compliance programs. In other words, regulators expect broker-dealers may not have been fully compliant by June 30, 2020. However, with time we can expect less leniency from regulators and a growing expectation that broker-dealers have their programs tailored to their business in order to comply with the obligations outlined under Reg BI and Form CRS.

Kaufman Rossin’s risk advisory services team has a turn-key solution that can help broker-dealers comply with Reg BI and Form CRS. Contact me or another member of our risk advisory services practice for assistance with these and other regulatory compliance matters.