Displaying items by tag: SEC

In an article for InvestmentNews, Mark Schoeff Jr. covers the latest developments in the SEC and FINRA’s implementation of Regulation Best Interest (Reg BI). Reg BI was passed in 2019 and implemented in 2020. It requires brokers to only recommend products to customers that are in their best interests, while also informing clients of any potential conflicts of interest and financial benefits to them. 

There were some questions about how Reg BI would fit in along with ‘fiduciary duty’ which is another standard that brokers must abide by. Based on recent SEC comments, it seems as if the Reg BI and fiduciary duty are working in tandem to ensure that brokers are placing their clients’ interests above their own. They also stress that although both may be triggered at different times, they are having a similar impact in terms of promoting better behavior from brokers.

In recent months, enforcement of Reg BI and the fiduciary standard have increased. In part, it’s due to greater clarity around the topic and a change in SEC leadership to Chair Gary Gensler and control of the body by Democrats. Until Gensler’s tenure, Republicans see Reg BI as the primary tool for oversight, while Democrats traditionally favor the fiduciary standard.

Finsum: One area of confusion has been the implementation of Reg BI which overlaps with the fiduciary standard for broker-dealers. Recently, the SEC has been saying that both are effective tools that are resulting in better behavior for brokers.

In an article for FinancialPlanning, Dan Shaw covered FINRA expelling SW Financial of Melville, NY for a variety of violations of industry rules. FINRA cited the firm selling private placement IPOs that were unsuitable for some of its customers. This is a violation of Reg BI, where brokers can only sell private shares to wealthy or accredited investors. 

As of April 2023, SW Financial had 38 representatives, 4 branches, and had been operating since 2007. SW Financial’s co-owner and CEO Thomas Diamante was suspended from the financial industry for 9 months and fined $50,000. Diamante and SW Financial agreed to the settlement without admitting or denying guilt. 

FINRA also said that the firm notified clients that it was receiving a 10% commission on the private placement but not that it would be getting an additional 5% in selling compensation. This is another violation of industry rules, where 10% is the most commission that can be earned. 

In total, the firm received about $2 million in compensation that created a ‘conflict of interest’ for the firm and its clients. They were also cited for a failure to conduct proper due diligence.

Finsum: FINRA expelled SW Financial for failing to follow Reg BI and churning customer accounts. 

Regulators are looking to get more aggressive about enforcement of Regulation Best Interest (Reg BI) which was passed in 2020. Regulators are particularly focused on sales practices to ensure that fiduciary standards are followed according to a Thomson Reuters article by Richard Satran.

Reg BI mandates that recommendations are offered with impartial advice and explanation of alternatives, including to competing firms. Along with the SEC, Reg BI has also been adopted by the Financial Industry Regulatory Authority (FINRA). 

One challenge for firms and regulators is that automated monitoring of transactions to ensure compliance is lacking. According to Parham Nasseri, VP in product and regulatory strategy at compliance software developer InvestorCOM, Inc: “Putting the risk assessments into a surveillance system for Reg BI compliance involves significantly more challenges than the kind of monitoring that systems have done in the past.” 

New elements to monitor include conflicts of interest, customer profiles, costs, alternative investments, and other client-specific factors. Along with the technological challenges, firms will have to comply with new exam requirements to comply with new sales practice rules. 

Finsum: Reg BI was passed in 2020 but regulators were slow to begin aggressive enforcement given the pandemic. This is changing and firms will be forced to rapidly update sales practices, training, and monitoring.

On Tuesday, the Securities and Exchange Commission announced its examination priorities for 2023. The agency said it is going to focus on Regulation Best Interest, ESG, the new marketing rule, and a host of other issues. When it comes to investigating Reg BI violations, the SEC will zero in on advisors’ recommendations on complex investments such as derivatives and leveraged ETFs, and high-cost and illiquid products such as annuities and nontraded REITs. According to the division, SEC examiners analyzing Reg BI will look at investment advice and recommendations, disclosures made to clients, the processes firms have in place for making best-interest recommendations, and the kind of factors that are considered in light of an investor’s profile, including their goals and account characteristics. The report stated, “Examinations may also focus on recommendations or advice to certain types of investors, such as senior investors and those saving for retirement, and specific account recommendations, such as retirement account rollovers and 529 plans.” The division will also be focusing on the SEC’s new marketing rule, which reached its compliance date last November after taking effect in May 2021. Examiners will be looking at whether advisors have adopted written rules and procedures that “are reasonably designed” to prevent rule violations. Several experts also believe that SEC examiners will expect firms to apply Reg BI standards to ESG recommendations.

Finsum:The SEC's Examinations Division released its annual Exam Priorities this week, detailing its areas of focus for 2023, which includes Reg BI, ESG, and the new marketing rule.

On Monday, the Securities and Exchange Commission warned that broker-dealers are using outdated systems to ensure Regulation Best Interest compliance, resulting in violations in areas such as rollover and account recommendations. In a recently released Risk Alert, the SEC’s exam division points to several compliance deficiencies that it has found during exams. Following Reg BI’s June 30, 2020, compliance date, the Division of Examinations started conducting broker-dealer exams to assess compliance with the rule. The risk alert calls attention to deficiencies noted during exams, and examples of weak practices that could result in deficiencies. The Risk Alert stated that moving forward, the exam division intends to incorporate compliance with Reg BI “into retail-focused examinations of broker-dealers, particularly those that include sales practices within the scope of the examination.” According to the SEC, broker-dealers are relying “heavily on surveillance systems that existed before the effective date” of Reg BI “without considering whether those systems needed modification.” The SEC also found conflict of interest failures such as broker-dealers not having written policies and procedures on how conflicts are to be identified or addressed and failures to disclose information on website postings. Other failures included registered reps acting in multiple roles, and the failure to disclose that these “multiple relationships require disclosures of capacity and may require additional disclosure of conflicts.”

Finsum:The SEC recently issued a Risk Alert, warning broker-dealers that they are using outdated systems to ensure Reg BI compliance, resulting in violations in rollover and account recommendations.