First Reg BI Enforcement Action Takes Shape, SEC Signals More to Come

It’s hard to believe it has been over two full years since the start of the pandemic. During this time, a number of regulations have taken shape, Regulation Best Interest being one example. Reg BI came into effect on June 30, 2020, right on the heels of the pandemic.

At the start of 2022, with the pandemic starting to wind down, it occurred to me that firms would finally get a sense of regulatory normalcy, in other words, they’d get a feel for how the SEC and FINRA would start enforcing Reg BI. And I was right. Two years into Reg BI, firms are finally getting a better understanding of what’s expected of them. Exams are taking shape and firms are feeling the pressure to comply, as the industry waits for audit outcomes.

Recently, the SEC levied its first enforcement actions for violation of Reg BI against an independent wealth management firm in the U.S. As a result of its audit, the SEC found that five brokers failed to put their clients’ interest first. The brokers recommended high risk and illiquid bonds to customers who, as it turned out (due to their low risk tolerance and/or need to access capital quickly), would not have been deemed suitable to purchase such speculative investments.

The SEC further found that at the expense of not acting in their collective clients’ best interests, the brokers generated high commissions and fees for the firm and themselves. SEC Chairman Gensler has vowed to act on these offenses. He has also very clearly signaled that while this enforcement action is the first, it certainly won’t be the last. Many more may lie ahead.

From the viewpoint of the compliance professional, one would wonder in such cases if it’s a case where firms simply don’t have the right processes and technology in place to monitor whether advisors are acting in the best interests of clients…or whether they’re simply turning a blind eye instead. Whatever the case, the outcome for the firm is the same. As more enforcement actions are revealed, lots of questions like these will be asked.

The reality is, firms are still learning to adapt to the now two-year old Reg BI requirements, and as they do so, fulfilling their duty of care means making an unwavering commitment to step up their game. Firms should leave no stone unturned when it comes to fully understanding what’s expected of them, and evaluating their advisor training, and supervision processes and systems. They’ll also need to keep a watchful eye going forward. It’s likely that Reg BI will continue to evolve and morph and add new requirements for years to come, especially in light of new trends that have started to sweep across the industry such as blockchain, digital currency, and ESG.

Want to learn more about how your firm can easily comply with Reg BI? I invite you to learn more about our Surveillance for Wealth Management solution.