SEC Issues New Warning on Reg BI Compliance Failures


The Securities and Exchange Commission warned Monday that broker-dealers are using outdated systems to ensure Regulation Best Interest compliance, which has resulted in violations in areas like rollover and account recommendations.

In a just-released Risk Alert, the agency’s exam division points to several compliance deficiencies the agency has found during exams.

After Reg BI’s June 30, 2020, compliance date, the Division of Examinations started conducting broker-dealer exams to assess compliance with the rule.

Moving forward, the Risk Alert states, the exam division intends to incorporate compliance with Reg BI “into retail-focused examinations of broker-dealers, particularly those that include sales practices within the scope of the examination.”

The risk alert highlights deficiencies noted during exams, as well as examples of weak practices that could result in deficiencies, the SEC explains.

Broker-dealers, according to the SEC, are relying “heavily on surveillance systems that existed before the effective date” of Reg BI “without considering whether those systems needed modification.”

For example, broker-dealers “did not consider whether existing surveillance systems were reasonably designed to prevent violations from occurring, to detect violations that have occurred, and to correct promptly any violations that have occurred with respect to new obligations regarding recommendations of rollovers, account recommendations, and implicit hold recommendations based on monitoring the customer’s account (if the firm has agreed to such monitoring),” the SEC said.

The agency also found conflict of interest failures, which included broker-dealers not having written policies and procedures on how conflicts are to be identified or addressed, as well as failures to disclose information on website postings.

Other failures involved registered reps acting in multiple roles, and the failure to disclose that these “multiple relationships require disclosures of capacity and may require additional disclosure of conflicts.”