When it comes to compliance, companies need to tailor their procedures and policies to the specific context in which the firm operates.
In 2020, the Securities and Exchange Commission conducted initial broker-dealer audits and evaluated processes for compliance with Reg BI. In 2021, the SEC expanded its audits to assess the implementation of policies and procedures designed to address the four components of Reg BI (disclosure, concern, conflict of interest, and compliance) by broker-dealers.
Reg BI is one of the few Securities and Exchange Commission rules that imposes a firm commitment to establish, maintain and enforce policies and procedures to achieve regulatory compliance. For broker-dealers, there are new aspects of Reg BI, such as, identifying, mitigating or eliminating conflicts of interest altogether.
Also, audits held in 2021 were focused on the need for broker-dealers to consider alternatives to any product they recommend, including cost considerations. The focus was also on issues that arise when making recommendations to new clients, assessing conflicts of interest and recommending complex products.
One of the responsibilities of broker-dealers and registered investment advisers is to provide retail customers with a relationship summary that contains information about the firm. Firms must also complete a CRS form. However, “hundreds” of firms did not complete the form in time. The SEC took immediate enforcement action against those firms that received multiple late filing warnings.
Corey Schuster, assistant director of the Securities and Exchange Commission’s Asset Management Unit, housed within the agency’s Enforcement Division says «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? »
Also, it is important to note that there was no previous requirement in the old FINRA rules in Reg BI to take into account reasonably available alternatives when making investment recommendations. An individual advisor is required to consider in detail and propose other available alternatives and investment costs in both relative and absolute terms when making investment advice.
Regulators also place an emphasis on “identifying conflicts”. Reg BI is setting new requirements for firms that are more comprehensive. It is necessary not only to identify and disclose conflicts, but also to actively manage and mitigate them.
Disclosure Done Right
Finance professionals should document their recommendations. Using CRM, spreadsheets and lists can help with this. However, when you have to deal with quite a large amount of information, it can be quite cumbersome and can lead to inconsistencies in data and reporting and make it difficult to provide oversight. Information about the investments, services, and costs identified in the plan must be collected in order to participate in a best interest analysis of the cost in the plan and in the proposed IRA to determine which alternative is in the best interests of the participant.
Paperwork can be expensive.. By accepting permission from the Securities and Exchange Commission to electronically disclose documents to customers, firms are taking an efficient and environmentally sound approach to regulatory compliance.With all this in mind, RiXtrema has built the Reg-BI optimizer that provides a complete solution for Reg-BI compliance; meaning you can relax, safe in the knowledge that you are prepared for any regulatory requirement.
Request a demo for our best compliance solution RegBI Optimizer, to always be prepared.