It has been just over 120 days since the US Securities and Exchange Commission’s (SEC) Regulation Best Interest (REG BI) rules came into effect, which made it a legal requirement for broker-dealers to put their customers’ interests first.
Now the dust has settled and firms have had time to implement their REG BI policies and procedures, FINRA and the SEC have been stepping up their efforts to review how those compliance programs are working in practice, and providing feedback on what firms have been doing well and where they have been falling short.
According to Robert Lavigne and Jennifer Sullivan at Bates Compliance, while firms have made pretty good progress so far, more work still needs to be done.
“Just because the compliance date has come and gone doesn’t mean that the onus has walked away from you as well, you still have a lot to do when it comes to REG BI, specifically around testing and refining,” said Lavigne, speaking on Global Relay’s webinar REG BI - 120 Days On.
What regulators want to see
FINRA and the SEC have published a series of FAQs—updated frequently, and which compliance officers should check regularly—about what the regulatory expectations are. For instance, regulators want to know how firms are managing REG BI governance going forward, such as who is involved in identifying conflicts of interest, who is responsible for testing policies and procedures, and who is ensuring that standards set are being met.
“Everybody knows what the rule says, now the hard part is evidencing how you’re complying with the rule, and testing is going to be a big part of how you can do that,” said Lavigne.
Disclosure obligations around REG BI and Form CRS is a key area that firms need to pay close attention to, said Lavigne. If firms are doing oral disclosures to clients, for instance, how are they providing evidence that they actually gave that oral disclosure?
Sullivan said regulators also want to see that care obligations go beyond suitability and that firms are doing proper due diligence into the products they are selling, while also demonstrating how reps are choosing from those products.
This is something that technology can potentially help with so that policies and procedures around Reg BI are both repeatable and auditable, and that compliance with the rules is being adequately monitored.
“One of the big reasons that technology is so helpful is because it eliminates some of the human error—are [your reps] going to properly log it in the CRM or that Excel spreadsheet you created? Are you going to be able to pull that up and show that they actually delivered it?” said Sullivan.
It is also important that compliance programs have teeth, she said. To that end, some firms have been fining reps for not following the rules.
Next level training
"Firms now need to advance their training programs from the initial lessons around what Reg BI is and dig deeper into the weeds to talk about the practical application of the rules and how it impacts different areas of the business," said Lavigne.
“You have to make sure that you are getting to that next level of training and that it’s not a constant regurgitation of the requirements,” he said. “It should be about what they have to do next and what it is they are expected to do on a daily basis to show compliance with Reg BI.”
On top of that, firms need to be well prepared for SEC exams. For instance, the regulator will likely want to see that firms have a process in place for obtaining and updating customer information, or what processes firms are using to determine that a recommendation is in the best interest of a retail customer. The SEC will also want to see detailed evidence of how firms planned for Reg BI and how those change management programs were executed, Lavigne said.
FINRA has also been calling on firms to use plainer English in their Reg BI and Form CRS disclosures. It doesn’t want to see legalese or footnotes—it wants the language to be clear enough for a 13-year-old to understand.
“The regulators have been very vocal about communicating their expectations and further defining them as situations come up,” said Sullivan. “There’s going to be very little excuse for non-compliance.”