The Word Is Out on SEC Examinations for Reg BI Compliance – the OCIE Risk Alert

On April 7, 2020, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert providing guidance for the SEC’s post–June 30, 2020, examinations of firms’ compliance with Regulation Best Interest (Reg BI). This guidance is covered more fully in our Client Alert of April 13, 2020.

In an effort to present transparency in its prospective examination for Reg BI compliance, OCIE’s Risk Alert includes a three-page Appendix that provides an example of an OCIE Reg BI examination document and information request list. OCIE encourages firms to use the documents listed in the Appendix to assess their implementation plans for Reg BI. Firms should study this exemplar request list closely.

In addition, the Risk Alert provides firms with information regarding the scope and content of the SEC initial Reg BI examinations, which will occur during the first year after the June 30, 2020, compliance date. While the SEC acknowledges that the coronavirus disease (COVID-19) has created challenges for firms, Reg BI’s compliance date will remain June 30, 2020.

Four Obligations of Reg BI

OCIE’s guidance aligns with the four “obligations” of Reg BI, and indicates that firms will be assessed on the components as follows:

  • Disclosure Obligation – OCIE advises that it may assess specific firm disclosures regarding the capacity in which a recommendation is being made; the material fees and costs that apply to transactions, holdings and accounts; and material limitations on the securities or investment strategies recommended by the firm.
  • Care Obligation – OCIE advises that it may assess the collection of the customer information that firms will use to develop customer profiles; the process for determining what is in the best interest of the customer; and the process by which recommendations are made and called out, specifically recommendations concerning rollovers and more complex, risky or expensive products.
  • Conflict of Interest Obligation – OCIE advises that it may assess policies and procedures to determine whether and how they address conflicts created by incentives, material restrictions on securities strategies (with specific reference to product menus and proprietary products) and how conflicts will be eliminated (calling out sales contests, sale quotas and non-cash compensation).
  • Compliance Obligation – OCIE advises that it will assess compliance with this obligation by reviewing the broker-dealer’s “policies and procedures and evaluate any controls, remediation of noncompliance, training, and periodic review and testing.”

Importance of the Appendix

When reviewing this OCIE Risk Alert, particular attention should be paid to the Appendix as OCIE has indicated it will review the documents described in the Appendix that are relevant to each firm in its assessment of the firm’s compliance. The SEC is looking for a firm’s good faith attempt to comply with Reg BI, to ensure that its policies and procedures are reasonably designed to comply with Reg BI, and that the books and records relevant to the firm (as detailed in the Appendix) are ready for inspection. These attempts likely will go a long way toward evidencing the firm’s good faith efforts at compliance.

Should you have any questions about this alert or need assistance in your readiness efforts, please contact Faegre Drinker‘s Best Interest Compliance Team and we will be happy to assist you.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Joshua Waldbeser

Joshua J. Waldbeser counsels plan sponsors and committees with respect to their fiduciary responsibilities under ERISA, as well as design and operational considerations for 401(k) plans, ESOPs and other defined contribution plans, cash balance and traditional defined benefit plans, and deferred compensation arrangements of all types. Josh also works extensively with insurance companies, investment advisors and funds, banks and trust companies, broker-dealers, record keepers, TPAs and other service providers with respect to ERISA, tax, securities and other compliance matters, including investment and fiduciary issues, as well as prohibited transactions and exemptions.

About the Author: Fred Reish

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.

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Joshua Deringer has developed a strong client following for his skill in expanding liquid investment options and implementing innovative structures for private and alternative investment funds. His forward-thinking counsel has made Josh a sought-after attorney for national and international financial services companies involved in all aspects of the investment management industry. Josh leads the firm's investment management practice group.

About the Author: David W. Porteous

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.

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