In a bold move, Securities and Exchange Commission Chairman Jay Clayton announced last week that the agency would proceed with the June 30, 2020, implementation date for Regulation Best Interest. Despite tremendous pressure by industry lobbyists, professional organizations and some SEC staff to delay implementation, Clayton said that although COVID-19 has rocked the financial services industry, “the law continues to apply.”
This approach surprised many in the industry. At this point, many firms are in the final stages of transferring operations to a work-at-home or other new environment, and only now can shift their focus back toward enhancing compliance protocols. Most long-term implementation projects, if not all of them, were placed on hold for an indefinite amount of time. As one can imagine, Reg BI was ostensibly one of those items put on the back burner.
Clayton explained, “Firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances. … SEC examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI.”
Given current uncertainty and challenges shaped by COVID-19, there are three key lessons that may guide firms daunted by the renewed significance of Reg BI compliance.
The Cloud Provides Flexibility
First and foremost, any technological changes implemented must consider a cloud-first approach. Even now, many firms struggle with persistent logistical challenges created by on-premises solutions, such as network capacity, VPN overload and performance lag. Cloud solutions enable flexibility for business continuity plans and for general business operations once we are past the current uncertainty. Given that Reg BI anticipates affecting over 57 million American households invested in the U.S. securities markets, geographical flexibility is paramount for robust compliance programs.
Additionally, many firms grappled to surveil a spike in trading volume at the same time their entire workforce was displaced. As a direct result, the alert quality and efficiency of the review process was dramatically impacted. Antiquated review processes relying on volume as opposed to alert quality will consistently fall prey to capacity constraints.
To combat this phenomenon, firms must not simply depend on more data, or large volumes of segregated alerts, but instead enrich their surveillance program by incorporating better correlations of numerous data types. Alerts generated off trade data alone can ascertain only a portion of the full story. Whereas trade data, combined with client email and text communications and combined with CRM notes will raise true Best Interest concerns to the top of the pile allowing for improved triage of compliance risk.
Engaging With Regulators When Facing Challenges
Lastly, regulatory agencies worldwide encourage firms to communicate when experiencing difficulties, particularly due to COVID-19. Most regulations in the modern era are based on reasonableness, which is not a bright line drawn in the sand. What is considered a reasonable measure can be influenced by the openness a firm has with its regulator. Chairman Clayton reiterated this sentiment stating, “[t]o the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19… the firm should engage with us.”
All market participants affected by COVID-19 and Reg BI should work closely with the SEC on these measures and continue to move toward full compliance. It is only through enhancing the public trust, innovating our approaches and adapting to the new normal that the markets may finally find the strength to forge a path forward.
David Ackerman is the global compliance lead at NICE Actimize and joined the firm in 2007. He is a licensed attorney and has an extensive industry background, having previously served as the chief compliance officer at an investment advisory firm.