Reg BI

SEC Files First Regulation Best Interest Enforcement Case

June 28, 2022 | Steve Parker

Earlier this month, the Securities and Exchange Commission filed its first-ever civil lawsuit seeking to enforce Regulation Best Interest. The case, filed in a federal district court in California, seeks permanent injunctions, disgorgement with prejudgment interest and civil penalties against broker-dealer Western International Securities Inc. and five of its registered representatives. Regulation Best Interest, also known as “Reg BI,” became effective in mid-2020, requiring broker-dealers and their associated persons to act in the best interest of their retail clients when making recommendations.

Reg BI does not apply to registered investment advisers, but, at the time of its adoption in 2019, the SEC issued guidance in which it affirmed and substantially clarified its view of what investment advisers must do to comply with their fiduciary obligations to their clients. Among those obligations is to act in the client’s best interests at all times. Both broker-dealers and investment advisers are required to deliver Client Relationship Summaries to their clients and prospective clients at various times. This document, among other things, describes conflicts of interests the firm has relating to the services it provides or the fees it receives.

SEC Updates Form CRS Disciplinary Guidance

October 16, 2020 | Bryan Gort

Last week the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) released updated guidance to the disciplinary disclosures section of Form CRS. The purpose of Form CRS is to provide a succinct summary of the business of the Investment Adviser or Broker-Dealer to provide a retail investor with the proper information to make an informed decision regarding whether an investment advisory or brokerage relationship is in the best interest of the investor. Form CRS also provides a platform to generate questions for clients to ask their financial professional to spark a conversation regarding the disclosures. Likewise, the purpose of the disciplinary section of the Form CRS is to give an overall indication as to whether the firm or its financial professionals have disciplinary history to disclose.

The SEC and FINRA place a high level of importance on ensuring that firms adequately disclose their disciplinary history to provide full and accurate disclosure to retail investors. Since June 30, 2020, the required implementation date of Form CRS, the SEC and FINRA have examined investment advisers to determine compliance with the guidance regarding Form CRS and Regulation BI. In its examinations, the regulators determined that many investment advisory and brokerage firms were either not providing a response to the disciplinary section or providing more details than the section’s instructions require. The following are summaries of the updated guidance on Form CRS disciplinary disclosures:

SEC Announces 2020 Examination Priorities

January 24, 2020 | Steve Parker

Earlier this month, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its examination priorities for 2020. Many of the priorities listed are similar to those identified in previous years’ priorities lists. The SEC’s approach in addressing them, however, continues to evolve to keep pace with the changing landscape of financial markets, market participants, products, technologies and risks. This post will address some of the areas that should be of concern to a large percentage of registered investment advisers (RIAs), broker-dealers and other regulated entities.

OCIE reiterated that a significant underpinning of any effective compliance program is the “tone at the top” set by C-level executives and owners. Those firms that prioritize compliance and effectively create a “culture of compliance” tend to be more successful in designing and implementing compliance plans than firms that view compliance as an afterthought or business hindrance. One of the “hallmarks” of a firm’s commitment to compliance is the presence of an “empowered” CCO who is routinely consulted regarding most facets of the firm’s operations. There is nothing new to these concepts, but it is worth noting that OCIE continues to emphasize them year after year. Although not stated in the priorities release, the degree to which a firm demonstrates a commitment to compliance often weighs heavily on decisions OCIE examiners must make regarding how deficiencies will be addressed by the Commission. All other things being equal, firms that have made mistakes but demonstrate the ability to make effective corrections will often be provided an opportunity to implement those corrections and are less likely to become the subject of an enforcement referral.

Not surprisingly, OCIE will continue to prioritize examining RIAs to assess compliance with their fiduciary duty to clients. For examinations of RIAs occurring during the second half of 2020, this will undoubtedly include the proper use of Form ADV Part 3, which RIAs are required to complete, file, and place into use with clients by June 30, 2020. Additionally, broker-dealers will be expected to implement compliance with new Regulation BI, requiring adherence to a best interest standard. The priorities list reiterates that advisers and broker-dealers must eliminate, or at least fully and fairly disclose, all conflicts of interest, as more fully explained in Investment Advisor Release 5248, issued in June of last year.

Among other priorities relevant to RIAs, OCIE also listed the protection of retail investors saving for retirement, information security, anti-money laundering programs and financial technology.

Eight States Sue the SEC in an Effort to Overturn Reg BI

September 25, 2019 | Parker MacIntyre

A number of state attorneys general have filed a lawsuit against the SEC, seeking to overturn the SEC’s recently adopted Regulation Best Interest or “Reg BI.” This not unexpected move comes in the wake of simmering discontent which has built up against Reg BI ever since its adoption on June 5^th. In a nutshell, consumer advocate groups, state regulators and some high-ranking SEC officials all oppose Reg BI on the grounds that it doesn’t go far enough in imposing a more rigorous standard of conduct on broker-dealer firms. This lawsuit, filed in New York federal district court, ramps-up this disagreement considerably.

Reg BI, which this blog has discussed in some detail recently, is part of a comprehensive package of new rules and interpretations released by the SEC on June 5^th. Specifically, the long-awaited Reg BI replaces the prevailing “suitability” standard of conduct applicable to broker-dealers and their registered representatives with a new “best interest obligation.” While under suitability, broker-dealers were only required to ensure that that their recommendations were “suitable” in light of a customer’s investment objectives and risk tolerance, the new best interest obligation requires that a broker-dealer always act in a customer’s “best interest.” Additionally, under Reg BI, the broker-dealer cannot place its interests ahead of a customer’s interests. Continue reading ›