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B/Ds Face Big Lifts to Reach Reg BI Compliance With Tech Tools

Firms must track the totality of a relationship between advisors and clients over multiple devices, according to several compliance experts.

During a discussion at the Financial Services Institute’s 2019 Forum last month, SEC Chief Counsel of the Division of Trading and Markets Emily Westerberg Russell made it clear to brokers that implementation day for the commission’s Regulation Best Interest rule was coming on June 30, 2020, and that waiting until the last minute would not be ideal.

“That’s the compliance date, and that’s all I say,” she said. “That’s the compliance date, so prepare.”

Since the rule was passed last June, there’s been much conversation (and consternation) about how to get in—and remain in—compliance, particularly for broker/dealers who will be tasked with adhering to a ‘best interest’ standard. But what does compliance entail, particularly from a tech standpoint? Are brokers doing all they need to prepare, and what do tech providers need to offer brokers so compliance can be achieved?

Regulators will seek to access end-to-end evidence of a relationship showing that an advisor adhered to best interest in the course of any recommendations made. This will entail archiving and organizational demands that brokers must heed, according to Anand Maheshwari, a global senior manager for product management at NICE Actimize, a provider of tech services for financial institutions seeking risk and compliance solutions.

“Most of the communications between representatives and customers could be calls, texts or webchats. From a tech solution provider, you need to ensure all conversations get captured, archived, indexed and processed with the right keywords,” he said. “That is what I see from a tech perspective; folks will need a holistic solution to capture all these conversations and trades.”

Brokers were already mandated to archive communications with clients, according to both SEC and FINRA regulations (they must also retain text messaging and social media communications with clients, if applicable). The largest issue is that the mix of structured data (actual trades committed) and unstructured data (communications with clients) must not only be archived but must also be accessible in such a fashion that it can paint a complete and clarifying picture of a client/advisor interaction, according to Donna Prlich, the chief business officer and general manager of social at Hearsay, a provider for tech compliance solutions.

“The (data) has to encompass the whole client journey that you’ve had,” she said. “Normally, datasets are created by analyzing client interactions, but usually in the aggregate. With Reg BI, we’ll have to be more focused on individual analysis, and that makes it harder.”

Hearsay Director of Legal and Regulatory Compliance Chris Fernandes said that Reg BI presented an additional complication for ensuring compliance; while collecting datasets is often done in the interest of a retrospective review, firms will want to have that “painting” of a relationship before regulatory scrutiny in order to avoid potential penalties; Prlich suggested that tech may need to supply lexicons that can search for triggering words in conversations that could suggest questionable conduct on the part of the broker.

“Can I show, based on the interactions that the broker/dealer presented, information on products or transactions that made sense for the consumers, but also that the products and services that were actually offered were suitable?” Fernandes said. “You can’t do that from an archival perspective, you need to do that from the start.”

According to Marianna Shafir, corporate counsel and regulatory advisor at Smarsh, Regulation Best Interest demands intensive scrutiny and adherence to previous regulations that brokers use only business communication devices in interactions with clients, as opposed to personal communications. She noted firms will also need a solution that can handle myriad communication channels.

“You need to make sure representatives are using (business) phone, email, etc. This way you can actually supervise the communications; if they’re using personal email the firm won’t be able to see whether they’re complying with the best interest rule,” she said. “Now it’s even more critical they capture and archive everything. Everyone captures and archives email, but not everyone’s doing text messaging, LinkedIn, social media apps, and you don’t want to lose the chain of custody in those communications.”

Numerous firms, including NICE Actimize, Hearsay and Smarsh, are offering solutions intended to address these concerns, and even FINRA is releasing information to help brokers prepare for implementation (earlier this month, the regulatory agency released a checklist intended to help brokers stay in compliance). Numerous compliance experts are also sounding alarms; in a client alert last month from the international law firm WilmerHale, attorneys warned brokers that they’d need to be able to “identify and gather data for disclosures,” “develop infrastructure to record delivery of disclosures,” “address requirements to post Form CRS prominently on the firm’s website,” “identify and track customers subject to Reg BI and their investment profile information” and “develop new surveillance” all well in advance of next year’s compliance date.

According to Raj Udeshi, a founder of the fintech firm HiddenLevers, brokers (particularly those at wirehouses) may be overlooking significant regulatory tech challenges because Reg BI has garnered much of the attention in the past year. His firm works with a wide variety of advisors, including a lot of those on the brokerage side. Specifically, he suggests that firms may not be instituting proactive procedures to avoid share class violations, like the kind that have been targeted through the SEC’s Share Class Selection Disclosure Initiative. It was announced in 2018 and enabled firms with undisclosed conflicts concerning their selections of mutual fund share classes to self-report to the SEC in order to avoid additional penalties. To date, more than 90 firms have self-disclosed.

However, firms still may not have the necessary concern about share class violations, assuming that the Trump administration’s deregulatory reputation would result in a more lenient SEC, according to Udeshi. However, he argued that nothing could be further from the truth, noting that the SEC is packed with nonpolitical appointees and career staffers, including many with backgrounds in assistant district attorneys’ offices.

“They came to the SEC to draw blood, and they want big payouts because that’s how they measure success,” he said. “After the (DOL) fiduciary rule fell out, they still want those things.”

Udeshi’s concerns about firms’ paltry responses to mitigating share class violations, coupled with Reg BI’s encroaching compliance date, mean broker/dealers need to recognize the seismic changes coming in 2020, according to Dave Ackerman, a regulatory compliance subject matter expert with NICE Actimize. He said intelligent compliance officers were taking Reg BI seriously, even if he felt much of the anxiety was unrelated to the specifics of the rule.

“It’s the perception the SEC is giving the market,” he said. “They’re touting Reg BI as the single greatest change to investor protection in decades. You can’t have the single greatest change in decades and leave everything the same. It’ll have to be more scrutinized. It’ll have to be an overhaul not only of the regulation, but of the processes that fall under that regulation.”

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