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Financial industry awaiting SEC’s next moves on Reg BI enforcement

On Behalf of | Jan 30, 2024 | Securities and Compliance

Brokers and financial industry experts are awaiting the Securities and Exchange Commission’s next steps on enforcement of Regulation Best Interest, according to an InvestmentNews report.

The SEC adopted Reg B1 in June 2020 to establish a “best interest” standard of conduct under which broker-dealers may not put their financial interests ahead of the interests of a retail customer when making recommendations.  Firms were given a one-year grace period to make a good faith effort to comply with the standard.  Separately, every broker or dealer registered with the SEC is required to file Form CRS, a new customer or client relationship summary.

Since then, the SEC and FINRA have taken some enforcement actions that pertained to the new regulation, including against firms that failed to file their Form CRS, but those cases did not rely solely on Reg BI compliance obligations.  Brokers thus have been watching to see if there will be a case that could only be filed under Reg BI instead of those that could be filed under the previous standard of conduct.

Sander Ressler, owner and managing director of Essential Edge Compliance Outsourcing Services, told InvestmentNews that he expects the year ahead to bring such a case that would fall under the Reg BI Care Obligation. It requires broker-dealers and their financial professionals to have a reasonable basis to believe that a recommendation of a securities transaction or investment strategy involving securities would be in the best interest of at least some investors.

“Regulators are looking at [Reg BI] very closely,” Ressler was quoted as saying. “This is going to be something that is going to be front and center in terms of regulatory actions in 2024.”   He said the SEC may be focusing on whether brokers are looking for better and cheaper investment options for customers to determine whether they are complying with the regulation.

“Regulators are going to take a much heavier hand when it comes to reviewing apples-to-apples product comparisons and where firms may not be comparing like products,” Ressler said.

Whether the SEC files an action unique to Reg BI in 2024 remains to be seen, another expert said in the report.  “I think it’s difficult to predict,” said Kurt Wolfe, counsel at Quinn Emanuel Urquhart & Sullivan. “We have been expecting a wave of Reg BI cases for a couple years, and we just haven’t seen it, especially from the SEC. They don’t seem to be focusing on it.”

In FINRA’s recently released 2024 Annual Regulatory Oversight Report, the authority found that broker-dealers are continuing to violate some of the basic requirements of Reg BI and Form CRS.  FINRA called for mitigating the risk of making recommendations that might not be in a customer’s best interest by establishing product review processes to identify and categorize risk and complexity levels for products.

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