The Securities and Exchange Commission will increasingly ask questions about firms’ Regulation Best Interest compliance during standard examinations, rather than just during exams focused solely on the rule, according to John S. Polise, an associate director with the National Broker/Dealer and Exchange Program at the commission’s Division of Examinations.
“What we’re working on now is we have a high-level fluency in our program with using BI, (and) we believe the registrants have a good understanding of what we expect from BI, so we’ll be integrating it into our regular programs and our regular exams,” Polise said, during a panel at the Practising Law Institute’s SEC Speaks virtual conference.
In discussing exam priorities, Polise said his division moved through several “phases'' of examining firms’ Reg BI compliance. At first, the commission focused on “good faith” efforts, not penalizing firms provided they were moving toward compliance. Last October, the SEC and the Financial Industry Regulatory Authority co-hosted a roundtable on their findings during this initial phase.
Last December, the commission announced the second phase, which was more substantive and included more testing of registrants, according to Polise. The agency’s qualitative analytics unit made specific data requests of certain firms during this phase, and Polise said the SEC developed tools to “use in the long run” when examining Reg BI compliance.
There will be no “phase 3” of Reg BI–focused exams, but firms would instead see components of the rule in other exams. After the SEC expanded the scope of Reg BI exams in late 2020, it also named Reg BI compliance as one of the DOE’s exam priorities for 2021, looking into whether brokers were making recommendations they believed were in a client’s best interest and whether they had amended product offerings to comply with the rule.
Daniel Kahl, the DOE’s acting director, called fiscal year 2021 “an incredible year” for DOE staff, saying the division would finish fiscal year 2021 at more than 3,000 total exams, marking the third time in the past 10 years it had done more than 3,000 in a single year. According to Kahl, the commission examined about 16% of its IA-registrant population this year, higher than its initial expectation of 15%.
In examining firms dealing with retail investors, Kristin Snyder, a co-deputy director and co-national associate director for the DOE’s Investment Adviser/Investment Company Examination Program, said the commission would continue to focus on conflicts concerning dual registrants, as well as revenue sharing and mutual fund share class practices. Snyder said the commission would continue to review ESG marketing, especially considering the “proliferation” of such strategies in the marketplace.
“We’re not making merit-based judgments about these investments, but making sure that what advisors are marketing and representing to clients is happening in practice,” she said.