Reg BI is getting real.
When regulators began conducting examinations to see
That was phase one. Going forward, firms can expect much closer scrutiny, according to Pete Driscoll, head of the SEC's Office of Compliance Inspections and Examinations.
"It's early stages for our phase two, but I will say that these are much more in-depth exams looking at a lot of the trading, a lot of the recommendations," Driscoll said at FINRA's annual conference, held virtually this month.
"Reg BI and Form CRS are a huge part of what our broker-dealer program is working on," he said.
Regulators' goal in phase one was to see that brokers were taking the new rules seriously and were on a path toward revamping their compliance programs, but did not, as a rule, seek to escalate any deficiencies they found.
While the next wave of exams will continue to look at firms' policies and procedures to see if they’re in compliance with the new advice, standard and disclosure requirements, they will also look under the hood to examine how reps are making recommendations and considering costs, as well as taking a close look at their trading activities, according to Driscoll.
"We've employed our quantitative analytics unit to be involved in these exams," he said.
"A lot of metrics we're pulling from a trading perspective — account turnover, new fees, old fees, conversions of different types of accounts, looking at the recommendations for different types of complex products," Driscoll said. "Those are all areas that we will be focused on, and a lot of that will be through the trade data."
In December, the SEC issued a
Driscoll also observed that many firms had been planning to roll out their training programs in the weeks leading up to the June 30, 2020 compliance date — exactly the time when brokers and advisors were moving to all-remote work due to the pandemic. He advised firms to revisit their training programs, particularly in light of all the guidance on implementing Reg BI that has come from the SEC and FINRA since the rule took effect.
Although they praise certain changes in a rule up for SEC approval, client attorneys and researchers say the process has further flaws.
"To the extent that you haven't done training, or effective training, just given everything that went on, I'd ask that you reconsider that and please go back and confirm the guidance you gave them on how to comply with the rule is still good and fulsome, particularly as we've provided additional information since then," Driscoll said.
FINRA's exam staff has uncovered similar training problems, and has also seen firms fundamentally misinterpreting the scope of Reg BI. Some firms, for instance, thought there was an exemption for advice provided to high-net-worth clients, when the rule plainly covers all recommendations made to retail clients.
Other firms seemed to think that Reg BI replaced FINRA's suitability rule. Bill St. Louis, a senior vice president with FINRA overseeing member supervision, reminded conference attendees that that rule is still very much on the books.
"Some firms basically did a search and replace for 'suitability,' replacing it with 'best interest' or 'Reg BI,' and that would be a mistake because the rule still applies, and also Reg BI introduces some nuances, some new requirements, that were not there in suitability," St. Louis said.
Driscoll said that firms have generally been handling Form CRS as expected, but that examiners have found some firms that have been couching their disclosures and other firm practices in "legalese" as opposed to the plain-language descriptions the SEC requires. Other firms have been omitting items from their disciplinary history, which they are required to include.
Regulators have also been dealing with hundreds of firms that
Driscoll described how his team has been contacting all of the firms that didn't file — including a subset that didn’t respond to the SEC’s original overtures.
"There were a number of firms that didn't respond to us," Driscoll said. "Now they're responding to an exam."
