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Reg BI Exams: Here's What to Expect

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What You Need to Know

  • SEC has employed its quantitative analytics unit to be involved in Reg BI exams and will look closely at trade data.
  • Areas of focus include rollovers, fees and complex products.
  • Best interest means best interest, SEC Chairman Gensler said.

Phase 2 Regulation Best Interest exams are still in the “early stages,” but “these are much more in-depth exams,” Pete Driscoll, director of the Securities and Exchange Commission’s Division of Examinations, said Thursday.

Speaking at the Financial Industry Regulatory Authority’s virtual annual conference, Driscoll said that the Phase 2 Reg BI exams are “looking at a lot of the trading, a lot of the recommendations” being made.

“We’ve employed our quantitative analytics unit to be involved in these exams,” Driscoll said. “We will continue to focus on policies and procedures and the effectiveness as well as the alternation of firm product offerings. We’ll also evaluate how firms are considering costs in a recommendation.”

The Customer Relationship Summary, or Form CRS, and Reg BI are a “huge part of what our broker-dealer program” is working on, Driscoll relayed.

In terms of looking at firm processes, the SEC is examining “supervision personnel and how their personnel make recommendations to new customers. We’ll look at firms that have recommended a rollover from an employee benefit plan,” Driscoll said.

“A lot of metrics we’re pulling from a trading perspective — account turnover, fees, new fees, old fees, conversions of different types of accounts — looking at the recommendations for different types of complex products,” Driscoll said. “Those are areas we are focused on and a lot of that will be through the trade data.”

Also, firms may want to take a risk-based approach to Reg BI compliance, Driscoll recommended.

“While Reg BI does not require documenting the basis for recommendations, firms may want to take the risk-based approach for deciding when it may be useful to document the basis for the recommendation,” for instance, if the recommendation is for a complex product. “Those are the things we’re going to gravitate to, those more complex products.”

Also, consider whether your firm has done a “deep dive” on conflicts and disclosures of conflicts, he said. “There’s a need to mitigate when those conflicts arise, particularly as it relates to registered rep compensation.”

Gensler on Reg BI: ‘Best Interest Means Best Interest’

During a question-and-answer session with FINRA CEO Robert Cook, SEC Chairman Gary Gensler stated that when it comes to Reg BI compliance, “best interest means best interest. Best execution means best execution.”

Added Gensler: “So, if you’re asking a lawyer, accountant or adviser if something is over the line, maybe it is time to step back from the line. Remember that going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law and its purpose.”

When it comes to ensuring that a brokerage is “making a determination that is truly in the best interest of that retail investor,” Gensler said, “it’s not always that the disclosure can get you there.”

The SEC, Gensler said, is “going to take a look at this through our examination function, it’s part of our enforcement function, but also where we can potentially weigh in and promote through guidance so that you all, doing your job day in and day out, understand that within that rule, these critical words, best interest.”


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