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Reg BI Enforcement to Zero In on Recommendations

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The Securities and Exchange Commission intends to shift its enforcement focus regarding Regulation Best Interest to “making a recommendation,” according to the agency’s draft strategic plan for the next four years.

“I think it’s significant that the Strategic Plan explicitly references the agency’s intention to enforce Reg BI in the context of ‘making a recommendation,’” Kurt Gottschall, a partner in Haynes Boone, and a former director of the SEC’s Denver Regional Office, told ThinkAdvisor Tuesday in an email.

The SEC is seeking comment on the plan.

The Strategic Plan for 2022-2026 states that the SEC intends to bring “cases that matter to all parts of the SEC’s mission — whether it be deceptive conduct by registered or private funds, offering or accounting frauds, insider trading, market manipulation, failures to act in retail customers’ best interests when making a recommendation, reporting violations, best execution and failure to act in accordance with the fiduciary duty, or any other form of misconduct.”

The language regarding failure to act in retail customers’ best interest “indicates the SEC is ready to move beyond basic compliance and disclosure obligations to scrutinize the placement of retail investors’ funds in advisory versus brokerage accounts, whether complex or risky products were offered to those investors, and registered representatives’ consideration of costs,” Gottschall said. “Broker-dealers should pay particular attention to their compensation arrangements with registered representatives to evaluate incentives and resulting conflicts.”

New Financial Products

The SEC’s plan also “expressly calls out the ‘evolution of financial products’ as a significant risk to the SEC’s ability to achieve its goals,” Gotschall notes.

New financial products, Gotschall said, “constantly present challenges for the agency. At times it can be difficult for the SEC staff to get their arms around new financial products, including sales channels, costs, liquidity in varying market conditions, and risks to investors.”

Regional Offices

The SEC also plans to promote collaboration among its regional offices.

Gottschall points out that “like many employers, the SEC discovered a few silver linings during its COVID-related telework posture. The pandemic allowed some very talented regional staff to work for headquarters in remote details and rotations, so I’m not surprised that the agency is acknowledging that in the Strategic Plan.”

However, he adds, the plan “also describes the agency’s continued struggle in finding the right telework balance. As of now, the SEC staff are not compelled to come into the office, and though a limited return to the office date has been set for after Labor Day, that date has repeatedly slipped, and the conditions have been subject to extensive discussions with the Union.”


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