On April 7, 2020, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert providing guidance for the SEC’s post–June 30, 2020, examinations of firms’ compliance with Regulation Best Interest (Reg BI). This guidance is covered more fully in our Client Alert of April 13, 2020.

In an effort to present transparency in its prospective examination for Reg BI compliance, OCIE’s Risk Alert includes a three-page Appendix that provides an example of an OCIE Reg BI examination document and information request list. OCIE encourages firms to use the documents listed in the Appendix to assess their implementation plans for Reg BI. Firms should study this exemplar request list closely.

In addition, the Risk Alert provides firms with information regarding the scope and content of the SEC initial Reg BI examinations, which will occur during the first year after the June 30, 2020, compliance date. While the SEC acknowledges that the coronavirus disease (COVID-19) has created challenges for firms, Reg BI’s compliance date will remain June 30, 2020.

Four Obligations of Reg BI

OCIE’s guidance aligns with the four “obligations” of Reg BI, and indicates that firms will be assessed on the components as follows:

• Disclosure Obligation – OCIE advises that it may assess specific firm disclosures regarding the capacity in which a recommendation is being made; the material fees and costs that apply to transactions, holdings and accounts; and material limitations on the securities or investment strategies recommended by the firm.
• Care Obligation – OCIE advises that it may assess the collection of the customer information that firms will use to develop customer profiles; the process for determining what is in the best interest of the customer; and the process by which recommendations are made and called out, specifically recommendations concerning rollovers and more complex, risky or expensive products.
• Conflict of Interest Obligation – OCIE advises that it may assess policies and procedures to determine whether and how they address conflicts created by incentives, material restrictions on securities strategies (with specific reference to product menus and proprietary products) and how conflicts will be eliminated (calling out sales contests, sale quotas and non-cash compensation).
• Compliance Obligation – OCIE advises that it will assess compliance with this obligation by reviewing the broker-dealer’s “policies and procedures and evaluate any controls, remediation of noncompliance, training, and periodic review and testing.”

Importance of the Appendix

When reviewing this OCIE Risk Alert, particular attention should be paid to the Appendix as OCIE has indicated it will review the documents described in the Appendix that are relevant to each firm in its assessment of the firm’s compliance. The SEC is looking for a firm’s good faith attempt to comply with Reg BI, to ensure that its policies and procedures are reasonably designed to comply with Reg BI, and that the books and records relevant to the firm (as detailed in the Appendix) are ready for inspection. These attempts likely will go a long way toward evidencing the firm’s good faith efforts at compliance.