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Reg BI Compliance Requires ‘Tailored’ Policies and Procedures: SEC

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What You Need to Know

  • Give registered reps specific examples of how to accomplish Reg BI's requirements, the SEC's Asset Management director suggests.
  • Regulators are also zooming in on conflict identification, said Cetera's Quinn.
  • Firms need to examine their disclosures regarding conflicts, Schuster advised.

When it comes to compliance with Regulation Best Interest, “firms need to tailor their policies and procedures to meet the unique circumstances of the firm and its products,” advised Corey Schuster, assistant director of the Securities and Exchange Commission’s Asset Management Unit, housed within the agency’s Enforcement Division.

During a recent panel discussion at the Insured Retirement Institute’s annual meeting, Schuster offered that advice as part of what the agency has learned during Reg BI exams.

“Reg BI is intended to substantially enhance the broker-dealer standards of conduct significantly beyond the suitability obligation,” Schuster said. “And it draws upon key fiduciary principles, including those applied to investment advisors under the Advisers Act.”

An important takeaway from exams, Schuster continued, “is that firms need to consider and foster an approach to tailor their policies and procedures to meet to unique circumstances of the firm and its products. I think it’s important to give registered representatives guidance on not just what Reg BI requires, but specific examples of how to accomplish its requirements. Firms may want to consider: Have you done a deep dive of conflicts? Have you examined your disclosures regarding conflicts? And is there a need to mitigate certain conflicts of interest?”

Mark Quinn, director of Regulatory Affairs at Cetera Financial Group, added during the panel that both the SEC and the Financial Industry Regulatory Authority are zeroing in on specific areas during exams.

For instance, “the new disclosure obligations in Form CRS and supplemental disclosures that most firms have created.”

Another area of focus: The new requirement in Reg BI “covering the requirements for advisors to consider reasonably available alternatives when making investment recommendations,” Quinn said. “This is new; there was nothing that specific in the old FINRA rules. And it requires the individual advisor, when making an investment recommendation, to explicitly consider and propose other available alternatives and the cost that the investment both relative and in absolute terms.”

The regulators are also zooming in on “conflict identification,” Quinn said. “Reg BI has new requirements for firms that are more robust and comprehensive, of not just identifying and disclosing conflicts, but actively managing and mitigating them.”