PLANADVISER - May/June 2020 - 39

compliance consult
David Kaleda
Evaluating Reg BI Compliance
5 takeaways from an OCIE Risk Alert
U
nless the Securities and Exchange Commission (SEC)
has a significant change of heart, the June 30 compliance
date of its Regulation Best Interest (Reg BI) is almost
upon us. However, broker/dealers (B/Ds) should not rest easy.
In a Risk Alert published by the Office of Compliance Inspections
and Examinations (OCIE), that agency announced how
it will be investigating firms to evaluate Reg BI compliance.
The alert is a valuable resource that firms might utilize to
check their preparedness. It also allows, and encourages,
continued work on compliance after June 30, particularly if
the COVID-19 pandemic has hampered full compliance. The
following are my top five takeaways from the alert.
1) Some firms should expect to be examined within
one year of the compliance date. The alert makes clear that
OCIE staff will be looking at firms' policies and procedures
to make sure they are reasonably designed to comply with
the regulation; in so doing, the staff will evaluate " whether
firms have made reasonable progress in implementing these
policies and procedures. " The OCIE states it " stands ready to
work with firms " on issues it identifies. The SEC's language
in the alert should be good news to firms whose compliance
efforts were disrupted by the pandemic.
2) Firms should not assume that they can stop working
on their compliance policies and procedures after June 30.
The OCIE will look to see which firms " make such modifications
as may be necessary and appropriate, in light of
information gained from the implementation process and
other facts and circumstances. " That is, firms should immediately
start reviewing how effective their Reg BI processes
and procedures are and work to improve them. This is
true for all firms, but especially those where compliance
was affected by COVID-19. Therefore, while OCIE staff will
not expect immediate perfection in compliance, they will
expect to see continuing efforts to improve.
3) The OCIE will carefully review firm disclosures to
examine compliance with Reg BI's disclosure obligation.
The OCIE staff will evaluate disclosures that the firm and its
representatives provide to retail customers about the scope
of their client relationship, limits on recommendations, firm
and registered representative compensation, and conflicts
of interest. Then it will compare those disclosures with the
actual conduct of the firm and its representatives based
upon information acquired from the firm. Therefore, after
the compliance date, firms should take a hard look at what
they are disclosing and determine if they need to disclose
more. Notably, Reg BI allows firms and representatives to
provide both supplemental written and oral disclosures.
4) The OCIE will verify that the information collected
from retail customers is sufficient to properly assess
whether the firm meets the compliance obligation. The
staff will look at how the firm obtains information about
customers and then how it uses that information to ensure
it can make a recommendation in accordance with Reg BI's
care obligation. Therefore, firms should evaluate whether
they indeed collect adequate information from their
customers. For example, if a firm choses to use its pre-Reg
BI customer profile and account application after June 30,
it should determine whether those elicit sufficient information
to understand, and make an appropriate recommendation
to, that customer in light of the risks, rewards and
costs associated with that recommendation. The alert gives
helpful information on how the firm can make such a determination.
It also suggests that firms particularly focus on
rollover and account-opening recommendations.
5) The SEC will expect that the firm be able to produce,
in writing, and fully explain all conflicts of interest, not
just those disclosed to the retail customer. To adequately
gauge compliance with the conflict of interest obligation,
OCIE examiners will compare a firm's processes and procedures
for addressing such conflicts against how the firm has
applied those procedures in any conflicts it has faced. To that
end, the staff " may request documentation identifying all
conflicts associated with the broker/dealers' recommendations. "
Firms should consider preparing a list of all material
conflicts, as defined in Reg BI, just in case the SEC conducts an
examination. Doing so will also allow firms to take a second
look at the agency's processes and procedures and determine
whether enhancements to their own policies should be made.
In summary, the alert serves as a warning that the
SEC may be knocking on your door in the coming weeks or
months. It also suggests that the examiners will be reasonable
in conducting their investigations, particularly due to
the pandemic. Importantly, the SEC is much more apt to take
this approach if a firm can demonstrate reasonable efforts to
comply with Reg BI on and after the compliance date, with
efforts to enhance policies and procedures after the date.
David Kaleda is a principal in the fiduciary responsibility practice group
at Groom Law Group, Chartered, in Washington, D.C. He has an extensive
background in the financial services sector. His range of experience
includes handling fiduciary matters affecting investment managers,
advisers, broker/dealers, insurers, banks and service providers.
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PLANADVISER - May/June 2020

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