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August 04, 2022

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The Second Phase of the SEC’s Reg BI Exams

Closing out 2020, the SEC’s Division of Examinations (OCIE) issued a Statement on Recent and Upcoming Regulation Best Interest Examinations. There the Division of Examinations announced its intention “to begin its next phase [of Reg BI examinations] by conducting more focused examinations … beginning in January 2021.”

The statement describes that two main points of the SEC’s focus will be on requirements of Reg BI that extend beyond customer-specific suitability alone, including:

  1. that broker-dealers need to have a reasonable basis to believe that recommendations are in retail customers’ best interests; and

  2. by conducting enhanced transaction testing designed to examine whether broker-dealers have implemented effectively their written policies and procedures.

Delving further into these broad categories, the statement advises that the SEC’specific focus areas during this next phase include:

  • Continued evaluation of firm policies and procedures, including evaluating specific firm processes for compliance with Reg BI, and alterations to firm product offerings, including the removal of higher cost products when lower cost products are available.

  • Evaluation of how firms have considered costs in making a recommendation, which may include:

    • what information is available to firm personnel to identify relevant costs;

    • how any such information has been used; and

    • any documentation of the consideration of costs.

  • Evaluation of the processes firm personnel have used to make recommendations to new customers – for example, if a firm recommended a rollover from an employee benefit plan, examiners will assess: what information was gathered from new customers; what disclosures were made at the time; how alternatives were considered; and what documentation was retained.

  • Evaluation of the processes firm personnel have used to recommend complex products, including what information was available and used to consider reasonably available alternatives.

  • Evaluation of the processes that firms have used to identify and address conflicts related to recommendations.

Of note, first is the SEC’s repeated discussion of costs and the heightened focus it advised its examination staff will apply to product costs. Firms will need to be prepared to justify that their registered representative recommendations in light of costs and that their supervision and compliance processes surrounding higher-cost product recommendations are justified, documented, and truly in the best interests of their clients. Second, as the SEC has been advising for some time, the Division of Examinations will be scrutinizing rollover recommendations in a more intense manner than in years past. Third and finally, and not surprisingly, the Division of Examinations will be scrutinizing whether recommendations for customers to invest in complex products are in their best interests.

The Division of Examinations has wasted no time in rolling out this next phase. Indeed, Faegre Drinker’s Best Interest Compliance Team has learned that the examination staff have already propounded the document and information requests to certain firms for this next wave, and we have obtained and analyzed one such information/document request.

© 2022 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume XI, Number 21

About this Author

Bruce Ashton, Drinker Biddle Law Firm Los Angeles, Employment Benefits Attorney

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and...

Sandra Dawn Grannum, Finance, Securities Lawyer, Drinker Biddle Law Firm

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has tried more than 50 arbitrations before the NASD and FINRA through award represented brokerage firms, banks, clearing firms, and associated persons. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

David W. Porteous Corporate Attorney Faegre Drinker Biddle & Reath Chicago, IL

David Porteous routinely counsels clients in the investment management, broker-dealer and financial services industries on regulatory matters including examinations, investigations and enforcement proceedings as well as complex civil and securities-related litigation. In addition, he assists clients in developing and implementing compliance and regulatory risk management plans and represents clients in complex civil and securities litigation.

Regulatory Agency Background

Before entering private practice, David was a staff attorney in the Securities & Exchange Commission...

Fred Reis Faegre Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

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