What You Need to Know
- The SEC is now looking for more than good-faith compliance efforts.
- Complex products are a focus now in Reg BI exams.
- Look to FINRA's playbook regarding potential Reg BI enforcement actions.
Regulation Best Interest exams have moved beyond a “good faith” compliance assessment, John Polise, associate director of the Securities and Exchange Commission’s National Broker-Dealer and Exchange Program within the exam division, warned Thursday.
While the agency has moved beyond the Phase 1 “good faith effort” Reg BI exam cycle, the agency is “not looking to do gotcha exams or make enforcement referrals per se,” Polise said during a webcast held by the Securities Industry and Financial Markets Association. “I think we’re still understanding that the rule is complicated, that there are myriad ways for individual firms to address the four core obligations” in Reg BI.
The SEC released a statement on Dec. 21 detailing its plans to ramp up Reg BI exams.
The SEC, Polise added, also still has “not identified ideal or best practices and can do quite a bit more in helping the industry comply with that.”
That said, Reg BI “is a serious obligation,” Polise added. “In our good-faith exams we saw very good efforts and attempts by people to comply with the rule but there were some areas that could certainly be improved. Would they rise to the level of enforcement referrals? Probably not— more like deficiency letters to encourage people to take a more aggressive approach towards some of those requirements.”
What’s a Complex Product Under Reg BI?
Kevin Carroll, SIFMA’s associate general counsel, stated that complex products will be probed under Reg BI Phase 2 exams, but noted such products are not defined. He queried Polise on what products fall under that definition.
Polise responded: Inverse or leveraged exchange products, penny stocks, variable annuities, derivatives, as well as securities with low liquidity “that may not be consistent with what a customer’s needs are” — asset-backed securities or investments tied to market volatility.
“While there’s no set definition” of a complex product, Polise explained, “I think we often look to … whether the rep can explain it in the first instance and whether there are higher costs associated with it.”