What You Need to Know
- BDs need to think broadly about how their communications with clients might be recommendations under Reg BI, Lee said.
- Think critically and carefully about which nascent practices may constitute recommendations.
- Mitigating conflicts demands steps beyond mere disclosure, Lee said.
SEC Commissioner Allison Herren Lee called on broker-dealers to “think broadly” about how their communications with clients might be recommendations under Regulation Best Interest.
In a recent speech, Lee also stressed that “where mitigation is specifically called for by the rule text, the requirement necessarily demands steps beyond mere disclosure.”
Lee, a Democrat, stressed to broker-dealers that when “evaluating the ways in which Reg BI applies to your business, think broadly about your communications with customers — no matter the form — to evaluate whether they might be recommendations.”
She stated that the securities regulator “was clear that disclosure alone will not sufficiently reduce the potential effect that certain conflicts may have on recommendations. Broker-dealers must take steps to affirmatively reduce the potential effect of conflicts so they do not taint recommendations.”
Broker-dealers, Lee warned, “should be thinking critically and carefully about the extent to which nascent practices in the industry may in fact, constitute recommendations. Emerging uses of technology present a clear example of an area that warrants close scrutiny, especially when such technologies are used to engage and communicate with retail customers in a way that is reasonably likely or designed to influence investment or trading behavior, even if such influence is subtle.”
SEC Chairman Gary Gensler also questioned recently when design elements and psychological nudges associated with digital engagement platforms, or DEPs, “cross the line” and become recommendations.
“The answer to that question is important, because that might change the nature of the platform’s obligations under the securities laws,” Gensler said at the Practising Law Institute’s SEC Speaks event.
Gensler said he’s asked SEC staff to take a close look at the feedback the agency received on the use of new and emerging technologies by financial industry firms as they make recommendations for the commission’s consideration, both related to brokers and to investment advisors.
Lee echoed in her remarks that it’s “also evident that, in an increasingly commission-free trading environment where broker-dealers generate substantial revenue from payment for order flow, incentives are shifting more and more from recommending particular securities to recommending day trading more broadly, irrespective of the securities traded.”