It was only a matter of time before the Securities and Exchange Commission moved on from asking advisors to simply “make their best effort” to comply with Regulation Best Interest, its 10-month-old investment advice rule, to actually enforcing the regulation.
Now, broker-dealers have begun receiving requests from SEC examiners asking them to justify and explain their registered reps’ investment recommendations, a panel of attorneys and former regulators said today.
“What we are already seeing in these regulator requests is that they are typically focused on … sampling firms’ data and transactions,” said David Porteous, a former SEC enforcement attorney and now a partner with the law firm of Faegre Drinker.
Porteous and others spoke during a webinar hosted by InvestorCOM on Reg BI.
According to Porteous, regulators are asking broker-dealers about particular products and customers for which there would be a greater need for documentation on transactions.
Right now, SEC examiners are watching the way firms monitor problems and trends, attorneys said.
“I’d expect them to look for patterns of recommendations of high-cost products, patterns of exchanges, [and the selling of] complex or risky products and significant trading activity, especially if that trading activity doesn’t align with customers’ risk tolerance,” said Ed Wegener, managing director of Oyster Consulting LLC. Wegener is a former vice president at the Financial Industry Regulatory Authority and was a member of the team that developed Finra’s risk-based examination program.
Looking For Patterns
SEC examiners are also “looking at patterns of complaints and what that is telling firms about the quality of recommendations,” when doing data analysis behind the scenes. “They’ll be looking for patterns of concern and asking you to respond,” Wegener said.
While the focus on product will vary from firm to firm, examiners will want to see consistency in how reps make recommendations and how firms monitor and address rising issues, panelists said.
“Certainly from a data-driven standpoint, we are seeing SEC requests that say ‘We want all transactions from X date to Y date,’” Porteous noted. “Then examiners will give you refined search criteria and further winnow down data to be able to say ‘OK, we’d like to see the information for XYZ customers to try to understand the basis of the documentation for these recommendations.’”