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Risky Business: SEC Risk Alert Highlights Broker-Dealers’ Anti-Money Laundering Miscues and Encourages Firms to Beef Up Protection

Ben Franklin once said “by failing to prepare, you prepare to fail.” Based on the SEC’s latest risk alert concerning broker-dealers’ anti-money laundering (AML) compliance (or lack thereof), some firms would be well served to heed Mr. Franklin’s advice.

The SEC specifically seeks to examine broker-dealers’ compliance with the various regulations and laws governing firms’ AML obligations. The risk alert highlights the SEC’s observations relating to firms’ deficiencies concerning (a) AML policies and procedures and internal controls; and (b) suspicious activity reporting (SAR). The SEC’s emphasis on AML should come as no surprise, as the SEC has previously included it as an exam priority. FINRA has additionally provided broker dealers with extensive AML guidance.

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SEC Exams for 2021 to Focus on Climate and ESG, Reg BI, Crypto, & More

The SEC’s Division of Examination’s (formerly OCIE) annual announcement of its exam priorities is always noteworthy. It provides helpful insight into this division’s thinking and can serve as a roadmap for regulated entities to focus their compliance and supervision planning. The announcement of these priorities is even more important following a change in the presidential administration and the changes at the Commission that inevitably follow. Not surprisingly, the recently announced Division of Examination priorities for 2021 (summarized below) align with the Biden Administration’s policy priorities and key trends in the financial landscape.

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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.”

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The SEC’s CCO Guidance Month

In an unprecedented move, the U.S. Securities and Exchange Commission (SEC) released guidance on several platforms in a 30-day period in 2020 regarding certain views on the important role and potential liability risks of chief compliance officers (CCOs). The SEC’s focus on the role of compliance is not new but sometimes the SEC’s support for compliance has not appeared to extend beyond the SEC’s Office of Compliance Inspections and Examinations (OCIE). In this article, we analyze the guidance provided by each source.
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Documenting Rollover Recommendations: The DOL and SEC Requirements

The Department of Labor (DOL) and the Securities and Exchange Commission (SEC) are focusing on rollover recommendations and their impact on plan participants. The DOL has historically taken the position that a recommendation by a fiduciary advisor is subject to the ERISA prudent man rule and the duty of loyalty (known in combination as a best interest standard), and has recently expanded the definition of who is a fiduciary advisor. The SEC says that rollover recommendations by investment advisers and broker-dealers are subject to its best interest requirements. This article discusses the recent DOL guidance and the SEC’s Regulation Best Interest (Reg BI).

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SEC Roundtable on Reg BI and Form CRS

The U.S. Securities and Exchange Commission (SEC) hosted a virtual roundtable in late October to discuss the Regulation Best Interest (Reg BI) and Form CRS. With a few months of observations from examinations since the June 30, 2020, compliance date, SEC and FINRA officials provided insights and tips for broker-dealer compliance with the new rules. The roundtable kicked off with brief remarks from SEC Chair Jay Clayton followed by a discussion among SEC staff from the Office of Compliance Inspections and Examinations (OCIE); and the Divisions of Trading and Markets and Investment Management. FINRA staff also participated.

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Applicability of Regulation Best Interest to Retirement Plans

The SEC’s Regulation Best Interest (Reg BI) applies to recommendations by a broker-dealer to “retail customers.” As the term suggests, a retail customer is a “natural person” (or the legal representative of a natural person) who uses the recommendation “primarily for personal, family, or household purposes.” This means that advice given to legal entities and advice related to investing the assets of a business are not covered by the regulation. But what about recommendations provided to retirement plans?

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SEC Joint Statement on Form CRS and New FAQs & Upcoming Roundtable

On October 8, 2020, the U.S. Securities and Exchange Commission (SEC) released a joint statement by SEC Chairman Jay Clayton and the SEC’s directors of the Division of Investment Management and the Division of Trading and Markets “Regarding New FAQs for Form CRS” (CRS FAQ Joint Statement). The CRS FAQ Joint Statement offers guidance to both broker-dealers and registered investment advisers (collectively, firms). The focus of this guidance addressed Form CRS disclosures regarding firm or financial professional disciplinary histories. Along with the CRS FAQ Joint Statement, the SEC modified and released its “Frequently Asked Questions on Form CRS” (Form CRS FAQs).

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