ALM Media photo of SEC headquarters in Washington, D.C. Securities & Exchange Commission building in Washington. (Photo: Diego M. Radzinschi/ALM)

As expected, the Securities and Exchange Commission’s exam division plans to ramp up oversight of brokers’ compliance with Regulation Best Interest starting in January, including recommendations on rollovers.

After assessing the results of its initial Reg BI exams and six months since the Reg BI compliance date kicked in, the SEC’s Division of Examinations will begin its “next phase” by conducting more focused exams.

As part of its plans, the division will examine whether broker-dealers have written policies and procedures and systems in place to achieve compliance with Reg BI, according to the SEC.

Division staff intends to expand the scope of exams in 2021 that focus on specific requirements of the Regulation. These include  those that go beyond suitability standards and require BDs to have a reasonable basis to believe that recommendations are in retail clients’ best interests.

The exam division also plans to conduct enhanced transaction testing designed to examine whether BDs have implemented effectively their written policies and procedures.

“Failure to have adequate written policies and procedures and failure to have adequate supervisory and compliance oversight may indicate recurring issues in complying” with Reg BI, the SEC states.

IRA and tax specialist Ed Slott of Ed Slott & Co., told ThinkAdvisor in a previous interview that “Most advisors don’t have a process in place to cover what the SEC Reg BI requires as to giving the clients the pros and cons of each option — roll over to an IRA, keep the funds in the plan, take a lump-sum distribution, convert to a Roth IRA or any combination of these.”

Said Slott: “My feeling is if more advisors were doing this, I would be getting questions.”

James Lundy, a partner at Faegre Drinker in Chicago, added in a Tuesday email to ThinkAdvisor that “the more focused, follow-up Reg BI Exams are going to prioritize product costs – and more specifically firms’ assessments and alterations of product offerings, how personnel identify and assess product costs, and the documentation surrounding these efforts.”

Regarding the latter, Lundy continued, “we have been advising the importance of reasonable documentation when higher cost products are recommended, so that firms are positioned as well as possible to withstand SEC scrutiny of whether the recommendations are in the customers’ best interests.”

The focused exams “will be delving deeper into firms’ rollover practices and recommendations of complex products,” Lundy said. “Firms with business models that significantly involve these areas should be prepared for visits from [SEC] examination teams.”

See Ed Slott: Advisors Falling Behind in Reg BI Rollover Compliance

The SEC noted the following areas that may be the subject of focus during a Reg BI exams:

  • Evaluation of how firms have considered costs in making a recommendation, which may include what information is available to firm personnel to identify relevant costs; and how any such information has been used; and any documentation of the consideration of costs.
  • Continued evaluation of firm policies and procedures, including evaluating specific firm processes for compliance with Reg BI, and alterations to firm product offerings, including the removal of higher cost products when lower cost products are available.
  • Evaluation of the processes firm personnel have used to make recommendations to new customers, for example, if a firm recommended a rollover from an employee benefit plan, examiners will assess: what information was gathered from new customers; what disclosures were made at the time; how alternatives were considered; and what documentation was retained.
  • Evaluation of the processes firm personnel have used to recommend complex products, including what information was available and used to consider reasonably available alternatives.
  •  Evaluation of the processes that firms have used to identify and address conflicts related to recommendations.

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