The Securities and Exchange Commission announced today that starting in January the Division of Exams will begin focusing its Regulation Best Interest exams on how broker-dealers have edited their product offerings, cost structures and procedures to reasonably ensure that financial advisor recommendations are in investors’ best interest.
The SEC said in a statement that its staff has assessed the results of their initial six months of Reg BI exams since the retail advice rule went into effect in late June, and now will move into the next phase by conducting more focused examinations beginning in January that go beyond suitability standards and require broker-dealers to have a reasonable basis to believe that recommendations are in retail customers’ best interest.
The regulator said its enhanced transaction testing is designed to examine whether broker-dealers have effectively implemented their written policies and procedures.
“Failure to have adequate written policies and procedures and failure to have adequate supervisory and compliance oversight may indicate recurring issues in complying with Regulation Best Interest,” the SEC said, adding that is providing transparency into its plans regarding Reg BI exams so that broker-dealers can set their expectations accordingly.
According to the SEC, focus areas for examiners will likely include:
• Changes firms have made to their product offerings, including the removal of higher-cost products when lower-cost products are available.
• Evaluation of how firms have considered costs in making a recommendation, including information about how firms are making available to personnel to identify relevant costs, and how such information is being used.
• Any documentation regarding the consideration of costs.
• Evaluation of the processes a firm’s personnel are using to make recommendations to new customers.
• Evaluation of the processes a firm’s personnel use to recommend complex products, including what information was available and used to consider reasonably available alternatives.