The Securities and Exchange Commission will expand the scope of its Regulation Best Interest compliance examinations starting in January.
The SEC's division of examinations, formerly the office of compliance inspections and examinations, said in a statement Monday it will focus next year on specific requirements of Reg BI, including those that go beyond suitability standards and require broker-dealers to have a reasonable basis to believe that recommendations are in retail customers' best interests.
The division also said it intends to conduct enhanced transaction testing "designed to examine whether broker-dealers have implemented effectively their written policies and procedures."
The statement provides broker-dealers and investment advisers with advance information about the expected scope and content of the expanded examinations for compliance with Reg BI.
The best-interest standard was the centerpiece of a package designed to address the obligations of broker-dealers and investment advisers when they provide recommendations or investment advice to retail investors. It was adopted in June 2019 and went into effect June 30.
In April, the SEC said initial examinations would be less onerous and focus on "good faith" efforts because of the disruptions caused by the COVID-19 pandemic.
The division outlined a few of the areas that examinations may focus on in 2021:
- Company policies and procedures, including evaluating specific processes for compliance with Reg BI, and alterations to product offerings, including the removal of higher cost products when lower cost products are available.
- How firms have considered costs in making an investment recommendation, which may include information available to firm personnel to identify relevant costs; how any such information has been used; and any documentation of the consideration of costs.
- The processes company personnel have used to make recommendations to new customers. If a firm, for example, 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.
- The processes used to recommend complex products, including what information was available and used to consider reasonably available alternatives.
- The processes used to identify and address conflicts related to recommendations.
With the statement, the division said it's attempting to be transparent so that broker-dealers can set their expectations accordingly.