The Securities and Exchange Commission has observed myriad shortcomings in how broker-dealers are complying with Regulation Best Interest, including insufficient policies around conflicts of interest and improper disclosures.
The SEC's division of examinations issued a risk alert Monday to highlight its findings from recent examinations and encourage broker-dealers to review their policies and procedures with respect to Regulation Best Interest, or Reg BI.
Reg BI is a rule package that took effect in 2020 that was designed to address the obligations of broker-dealers and investment advisers when they provide recommendations or investment advice to retail investors, including rollover recommendations. Its centerpiece best-interest standard aims to compel brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts.
Reg BI's compliance obligation requires broker-dealers to establish written policies and procedures reasonably designed to achieve compliance with the rule, the SEC noted in the risk alert.
However, SEC staff members have observed that some broker-dealers do not have such written policies and procedures while others did not identify the parties responsible for creating or updating disclosures, how to identify that material changes have occurred, or when material changes should result in new or updated disclosures.
With respect to Reg BI's conflict-of-interest obligation, some broker-dealers did not have written policies and procedures reasonably designed to specify how conflicts are to be identified or addressed. Moreover, others "inappropriately relied on disclosure to 'mitigate' conflicts that appeared to create an incentive for the financial professional to place its interest ahead of the interest of the retail customer, and did not establish any mitigation measures," the SEC said.
To address the issues identified by the SEC staff in deficiency letters, many broker-dealers modified their practices, policies and procedures, the SEC said.
