The Division of Exams said it plans to expand the scope of exams to focus on assessing whether broker-dealers are making recommendations that they have a reasonable basis to believe are in customers’ best interests and evaluating broker-dealer processes for compliance and alterations made to product offerings.
Examiners will also conduct “enhanced transaction testing” as part of these examinations, and will evaluate firm policies and procedures designed to meet additional elements of Reg BI, including rollovers and alternatives considered, complex product recommendations, assessment of costs and reasonably available alternatives, how sales-based fees paid to broker-dealers and representatives impact recommendations, and policies and procedures regarding how broker-dealers identify and address conflicts of interest, the SEC said.
The agency also plans to step up exams of RIAs that manage private funds, which frequently have significant investments from pensions, charities, endowments and families.
“Specifically, the division will review for, among other things: preferential treatment of certain investors by advisers to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals; portfolio valuations and the resulting impact on management fees; adequacy of disclosure and compliance,” the SEC said.
As a way to underscore its concern with Robinhood’s recent trading halts, the division said it will “continue its prior initiative in the area of payment for order flow and its possible effect on order routing and best execution obligations.”
While citing its determination to look for conflicts of interest in the RIA space in the coming year, the agency also warned that it may not be able to keep pace with the industry if it does not get additional funding. “There is “a significant risk that, in light of industry growth and increased complexity and other factors, the agency does not have sufficient resources to adequately cover the RIA space. The division’s coverage rates will likely not keep pace with the continued growth in the population and complexity, without corresponding staffing increases,” the report concluded.