SEC Chair Gary Gensler has not publicly stated much regarding Reg BI since Spring of this year. Generally, though, the messaging from SEC leadership regarding the Division of Examinations and the Division of Enforcement continues to be aggressive. In the retail investor area, for example, in late August Chair Gensler appointed Barbara Roper, the Director of Investor Protection for the Consumer Federation of America, as a Senior Advisor to the Chair. Turning back to Reg BI specifically, what we continue to hear out of the SEC is that Chair Gensler’s regime is going to play the Reg BI “hand that it has been dealt” aggressively.
On November 4, 2021, SEC Commissioner and former Acting Chair Allison Herren Lee gave a speech at ACLI’s CLE 2021 Conference on Life Insurance Products entitled “A Call to Action: Recommendations for Complying with Reg BI.” Commissioner Herren Lee covered several Reg BI topics, including what constitutes a recommendation and mitigation. Regarding recommendations, she noted that the Commission’s supplemental materials accompanying Reg BI speak of a “call to action” that may be viewed as influencing an investor to invest in or trade a particular security being enough to constitute a recommendation. On this topic, she emphasized the importance of the account opening process. Commissioner Herren Lee also addressed mitigation, in particular to manage the risk of an associated person putting their interests ahead of their customers, perhaps due to limitations in the firm’s products menu.
Also, this autumn, and as reported in the financial press, we have learned that the SEC Division of Examinations has been issuing Reg BI examination deficiency letters across the brokerage industry. We have learned that, while there are a variety of deficiencies, two common themes have emerged. Consistent with the last point above from Commissioner Herren Lee’s speech, the SEC is dissatisfied across the industry regarding compliance with the conflicts of interest associated with reasonably available alternative investments and the varying types of investment products that registered representatives need to consider before making recommendations to their clients.
The Division of Examinations concerns include reasonably considering cost, product risk, and account type such as rollover recommendations. Further, the Division of Examinations has found that certain firms completely lack any policies and procedures in this area. The Division of Examinations has advised firms that they want to see firms provide better guidance to the registered representatives in the field and, of course, better training for them in this important area. The second concerning theme by the Division of Examinations that has been reported is one that we have covered previously in this blog, and that involves ongoing compliance with the conflicts of interest obligation. The deficiencies described found certain firms failing to comply with this obligation on an ongoing basis. While certain deficiency letters noted that firms made efforts to comply with this obligation by the effective date of Reg BI, firms failed to continue such efforts going forward. The SEC, to the contrary, sees compliance with this obligation as a “living process” and expects to see firms evolve in their compliance with this obligation as conflicts evolve and arise over time. As we have discussed in this blog and elsewhere, firms need to have a process in place to manage, track, and evaluate conflicts and this should be done by some sort of a committee and the evaluations need to be done on a periodic basis, and documented.
In terms of the Division of Enforcement, we have yet to see any Reg BI cases filed against firms. But the recent, significant Reg BI deficiency letters is indicative of potentially some of those firms having those findings referred to the Division of Enforcement. To the extent that some of these examinations involved wholesale failures of the policies, procedures, and supervision regarding alternative investments and/or the conflicts of interest obligation, then those firms have exposure to Reg BI violations for failing to comply with the “compliance obligation.” This obligation is similar to the SEC’s supervisory rules, and the Division of Enforcement has a lengthy and deep track record of charging firms with supervisory failures.
Going forward, brokerage firms should continue to be mindful of the SEC’s Division of Examinations prioritizing Reg BI and that, perhaps someday and perhaps soon, we may start to see the Division of Enforcement file the first cases for violations of Reg BI.