After gauging firms’ compliance with Regulation Best Interest by ‘good faith’ efforts made since it was implemented earlier this year, the SEC will conduct “more focused examinations” in 2021, according to a statement from the Commission’s Division of Examinations.
“Building on staff’s initial assessments, Division staff intends to expand the scope of examinations in 2021 that 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,” the statement said. “The Division also intends to conduct enhanced transaction testing designed to examine whether broker-dealers have implemented effectively their written policies and procedures.”
The statement detailed numerous potential subjects of focus in 2021 exams. The division will continue evaluating policies and procedures, including whether firms changed product offerings to remove higher cost products when lower-cost products were available. They may also question how firms consider costs when making recommendations, what information is available for personnel to identify costs, how that information is used, and how the consideration of product costs is documented.
Examinations could also look at how firms make recommendations for new customers, including what information was taken about new customers, what disclosures were made, what alternative recommendations were considered and how the process was documented. When recommending complex products, the staff will look at if and how “reasonably available alternatives” were considered and investigate how firms are identifying and addressing conflicts.
The division detailed its previous communications with representatives about how it would conduct Reg BI compliance exams, including a risk alert prior to the rule’s June 30 implementation date. The alert detailed how the SEC would be looking for “good faith” efforts to implement policies and procedures created in order to comply (a line of thinking echoed by FINRA regulators in the run-up to the rule’s implementation).
In October, the SEC co-hosted a roundtable with FINRA on initial observations from Reg BI examinations. While Chair Jay Clayton and Commission staff lauded firms’ efforts to get in compliance, the lack of disciplinary disclosures was “the biggest issue” regulators had seen since implementation, according to Jim Wrona, vice president and associate general counsel at FINRA.