“Firms could be in a similar position with respect to Reg BI without realizing it,” Wolfe said.

For instance, a November 2021 survey conducted by the North American Securities Administrators Association (NASAA) found that firms had not really changed their processes, procedures or compensation structures since Reg BI went into effect. Some firms even claim they have no conflicts of interest to manage.

NASAA also found examples of what it described as “presumptive breaches” of Reg BI, including firms using the “advisor” or “adviser” title while operating in a broker-dealer capacity, which the SEC has stated constitutes a breach of Reg BI’s disclosure obligation, Wolfe said. 

“For better or for worse, there is no precedent guiding enforcement of Reg BI. This blank slate gives the SEC wide latitude to interpret Reg BI, and the SEC’s Division of Enforcement significant discretion in enforcing the rule,” Wolfe said.

How do broker-dealers avoid becoming a test case for the SEC’s best interest standard?

“Firms that anticipate, or are facing SEC investigations or enforcement actions, should document steps that they have taken to enhance their compliance programs, policies, and procedures under Reg BI, so they are positioned to educate regulators (or courts, if necessary) about the affirmative steps that they have taken to comply with Reg BI,” Wolfe warned.

The second wave of SEC enforcement “will likely consist of more nuanced enforcement actions, challenging conduct where the application of Reg BI is less clear,” the attorney warned.

For instance, the SEC may challenge if broker-dealers have acted consistently with their duty of care and best interest, including with regard to consideration of alternative investment products, Wolfe said.

The agency may also question if self-directed online investment platforms make “recommendations” of investment products or strategies within the meaning of Reg BI, he added.

Of course, firms facing enforcement investigations and actions in any of these areas are not without defenses, Wolfe said.