The SEC recently released a risk alert related to Regulation Best Interest (Reg BI) in order to highlight deficiencies noted during recent examinations, as well as examples of weak practices that could result in deficiencies. According to the SEC, the goal of the Risk Alert is to “assist broker-dealers in reviewing and enhancing their compliance programs related to Regulation Best Interest.”
Below are examples of deficiencies and weaknesses observed by Division staff:
Policies that did not meet the Disclosure Obligation
Some broker-dealers did not have written policies and procedures reasonably designed to achieve compliance with the Disclosure Obligation. Examples of this include:
- Policies that did not specify when disclosures should be created or updated or how the updated disclosures should be delivered to retail customers;
- Policies that did not identify the parties responsible for creating or updating disclosures, how to identify that material changes have occurred, or when material changes should result in new or updated disclosures;
- Policies that did not have a process to demonstrate that disclosures had been provided to retail customers.
Policies that did not meet the Care Obligation
Some broker-dealers did not have written policies and procedures reasonably designed to achieve compliance by their financial professionals with the Care Obligation. Examples of this include:
- Policies that directed financial professionals to consider reasonably available alternatives without providing any guidance as to how to do so;
- Policies that directed financial professionals to consider costs without providing any guidance as to how to do so;
- Policies that created systems that allowed financial professionals to evaluate costs or reasonably available alternatives but did not mandate their use (or, in some instances, firms could not determine whether or not they used the systems because they lacked supervisory review documentation);
- Policies that directed financial professionals to document the basis for their recommendations but did not give instructions as to when documentation is necessary or appropriate.
Policies that did not follow through on Testing/Training
When adopting Regulation Best Interest the Commission noted that depending on the size and complexity of the firm, a reasonably designed compliance program generally would include, among other things, a training program and periodic review and testing. Examples of this include:
- Policies that relied heavily on surveillance systems that existed before the effective date of Reg BI without considering whether those systems needed modification;
- Policies that relied on documentation maintained locally, rather than in a central location so that the reviews designed to achieve compliance could only occur during branch examinations;
- Training that did not identify the firms’ processes for compliance with Reg BI (e.g., the tools or methods that employees could use to comply). For example, while some broker-dealers required the use of certain systems to evaluate the recommendation, the proper use of the systems was not addressed in the training.
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Policies that did not address Conflicts of Interest
Staff observed a number of deficiencies related to the requirement that broker-dealers have written policies and procedures reasonably designed to address conflicts of interest associated with their recommendations to retail customers. This includes:
- policies that did not assign responsibility to identify and address conflicts to a specific position or unit (e.g., a conflicts officer, a specific unit within compliance, or a conflicts committee). In addition, some written policies did not prohibit sales contests, sales quotas, bonuses, and non-cash compensation that were based on the sales of specific securities or specific types of securities within a limited period of time.
To read the complete Risk Alert, click here.
