Please Note : These notes were made from the following video link from the SEC round table and are not the opinions of the writer. You should listen to the archive as shared below from the SEC site to make your own interpretations. Only the key points as the writer has understood, have been included here. These have been included for the sole purpose of helping anyone who may not have attended the event and may find it useful to hear the gist of the webinar and should not be treated as complete or as advice.
Notes from SEC Chairman Jay Clayton’s speech and observations and quoting from his speech
Key Objectives of Reg BI – To enhance and significantly increase the quality and transparency of relationships between Broker dealers, their investment advisors and retail investors
RegBI and Form CRS are designed to bring legal requirements and mandated disclosures for firms serving retail investors in line with reasonable investor expectations
Collectively they are designed to preserve retail investor access in terms of both choice and cost to a variety of investment services and products fostering transparent and healthy competition
Reg BI establishes enhanced standards of conduct, that requires Broker-dealers to act in the best interest of retail customers and not place their own interests ahead of their retail customers
This standard applies when a BD recommends to a retail customer a securities transaction or an investment strategy involving securities including an Account recommendation such as a retirement fund rollover
It is a substantial enhancement higher than traditional suitability obligations
Standard of conduct cannot be satisfied by disclosures alone
Form CRS brief relationship summary has been created to help retail investors make choices, of the kind of relationship – brokerage, investment advisor or both, that best suits her or his particular circumstances and to improve the dialogue between retail investor and investment professionals
All firms must provide retail investors in plain English disclosures on same topics under standardized headings and in prescribed order to help retail investor make comparisons across various firms for their services, services, relationships, fees, costs, conflicts of interests and other important information and encourages them to ask questions and offer additional sources of information that retail investors may wish to consider
Reg BI codifies the fundamental principles that investment professionals should not put their interests ahead of their clients. Form CRS enables investors to understand the services they will receive and how they will be charged for those services
Reg BI and Form CRS are specially important and can offer significant benefits for main street investors as they seek to address the COVID-19 pandemic and resulting market volatility
Reg BI applies expressly to account recommendations. For many investors, this type of recommendation can come at a critical point, including at retirement, and can have significant long-term impacts.
- It is now clear that any such recommendation must only be made after an assessment of the risks, rewards and costs and the particular investor’s circumstances and objectives—a key component of Reg BI—in addition to the other three specific component requirements of Reg BI.
- Ultimately, such a recommendation must comply with the over-arching requirement that the recommendation be in the best interest of the retail customer and that the broker not place her or his interests ahead of the retail customer’s interest.
Notes from Reg BI – Issues and Observations Panel
Observations on the Compliance Obligation
Most organizations had made Good faith effort but there was divergence in some firms and sometimes needs adapt to their business models
Policies and Procedures
o In some cases policies need to provide additional guidance to registered representatives on how to identify reasonable alternatives
o Policies need to be in place for broader conflict management to eliminate, mitigate them and ensure they were included in disclosures where important to reveal to clients
o Policies should cover the process of cost as a consideration for securities recommendation, Rollover and Account type recommendations
o Should include the process needed to be followed for identification of reasonably available alternatives
FINRA exam observations
- In some cases procedures lacked specific details – who will do what, when and how
- Lack of controls around testing of procedures
- Some of them did not show plans around record keeping requirements
- Training is very critical to help Registered Reps and Principals need to have good understanding of their obligations
- Training should focus on how to comply and not just how the requirements are defined by the regulation
- Post training tests for the Personnel should be included to ensure training has actually become memorialized.
- Some of the concerns on Training was that, it too late. Some firms had just handed out procedure documents as training material.
Conflicts of Interest
- Firms cannot take existing suitability obligations and replace it with Reg BI in policy documents
- Some firms created Conflicts Inventories and remediation processes resulting in removal of high risk, high cost products and removal of share classes from Mutual funds. It is important to compare products and removing those which have higher costs
- Firms need to have a regular process for reviewing their compensation agreements including those with their affiliates, businesses and monitor associated person activities
- Many firms have built to Conflicts matrices and approach to each of the conflict and have evaluated their Product mixes
- Compensation ranges seemed to have levelled to reduce incentivizing sales that lead to conflicts.
- People have managed to identify comparable products and engaged with product manufacturers to rationalize compensations where appropriate
Please refer to the Conflict of Interest FAQ
Please refer to the SEC has a detailed FAQ on Rollover firm of a retirement plan – How the Care obligation applies and how to consider cost in the analysis e.g of 401 K and conflict of interest obligation, mitigating and eliminating when making the Rollover recommendations
- Implementing supervisory procedures are important to monitor recommendations when rollover or transfer assets from one account type to another and one product class to another
- Policies and procedures should be designed to reasonably reduce the impact of incentives for Financial Advisors to put their interest over customer interest or business interest over customer interest in making these recommendations
- Policies should include definitions of conflict mitigation methods
- Supervisions on sales activities and compensation comparison should be conducted
- Please refer to FAQ on Mitigation methods and potential mitigation methods
- Please refer to 2nd FAQ – forgivable loans are conflict and where they need to be waived
Conflicts not addressed
- Less transparent forms of compensation must be identified for e.g. Vendors paying reimbursements or gifts and monitor them for e.g. incentives contingent on sales clauses, or of specific types of sales within tight deadlines.
- Some firms have not done a good job of their inventory of conflicts
- Brokers should review their product menus as part of the care obligations and keep track of reasonable consideration of possible available alternates
- If recommending propriety products, clear disclosures of limitations and conflicts in the recommendations and material conflicts that may not be in the best interest of the client should be made.
Disclosures and Form CRS
- They would encourage the reading level of Form CRS to be at 8th Grade level to make it easy to understand for retail investors
- Common mistakes were dense lettering, links not working, boiler plate language and marketing type “superlative” language.
- Affiliates, their roles and relationships were not clearly stated in some cases.
- Adherence to the defined structure of Form CRS was not maintained in some cases
- Disclosures on fees and compensations were not detailed in some cases
- Form CRS needs to be made easily available to investors
- Disciplinary History should also be stated in the Form CRS. There were cases where disciplinary history existed but was missing in the Form CRS
- There were disclosures that were missing or not accurate. Accuracy of disclosures that were sent as well as those on the website are important
Some guidelines for Disclosures
- Date on disclosures on when it went into effect should be shared with clients. Disclosures with material changes should be shared with clients within 90 days of the change.
- Electronic delivery is acceptable when permitted
- Record keeping on the delivery is a must and procedures must be defined to do that
- Notice to Client is important. Access is not equal to Delivery.
- Evidence to show delivery is important. It needs the investor to consent on the affirmatory that they have accessed it
- Use of the title Advisor should be monitored on social media to ensure restrictions are being followed
- Disclosure FAQs from SEC are available on this link and adhered to
Notes from La Meer Inc.
Why should you address Reg BI with an integrated approach ?
As seen from the notes above, there are many aspects of Reg BI compliance as specified by the four obligations of the regulation that call for a good process in place and integrated technology to help establish the best interest practices and compliance culture in the organization.
Online management for changing policies and procedures, tied to attestation, and training of the staff can help keep the workforce deeply understanding of the various nuances expected of them.
Product governance and oversight on the products and the alternates that can be offered based on costs, fees, risks and returns analysis and tying them to the client risk profiles clients, specially ensuring the 401K Rollover processes are properly monitored for oversight is key for organizations specially in this COVID and volatile market situation.
It would be important to empower Advisors and Representatives with Advisor Portals to help gather their client information, arrive at the Client’s Risk Profile and choose the right account types, products and alternates from the curated information from the product governance process. They can keep notes and share information with clients to their Client Portals to engage with them through out the process, and ensure they are comfortable with the choices that were made for them. This can be specially helpful for the 401K Rollover process through a streamlined and managed approach of questionnaires and information gathering between Advisors and Clients to create appropriate account types, products and product transfers leaving good record keeping of all the interactions.
Compliance should be offered an online and workflow based Portal to help them manage the oversight on the choices and notes made by the Advisor and preferences of Clients from a single source of truth to ensure that the account and product choices were indeed the best possible in the interest of the clients
Clients should be offered mobile online access to their products, alternates and portfolios as they are being discussed as well as ongoing transactions, positions and monitor their performance, fees and also report complaints as they see any violations
Conflicts of interests within the organization, disclosure management, disclosures sharing and acknowledgement from clients on their Client Portal can ensure that all up-to-date disclosures are shared with clients and they are made aware of all material changes as soon as they happen.
Oversight processes and portal based access for organizational compliance need to be offered to everyone in the firm for pre-approvals of trades, outside activities, gifts, political donations, personal trade monitoring, client trade analysis for portfolio drifts, fees and billing analysis and many other functions for early identification of conflicts and violations.
Compliance can drill down to all the records and see aggregations, trends and exception red-flags to bring to their notice violations early and meet the record keeping obligations for regulatory examinations
An integrated approach and data management strategy is the best way for organizations to manage the process for the long term
GRACE – La Meer’s Reg BI cloud based web-tablet-mobile enabled offering addresses all these areas and helps you build a single source of truth for all the processes needed for Reg BI compliance. The GRACE system is modular so you can choose to use whichever modules you may need, without disturbing your existing investments in other solutions. It also helps you build the integrated data with deep drill down analytics that can help you understand your client’s needs better and offer them non-conflicted advice over the long run. A scalable web, mobile, tablet enabled tool can help you empower your organization and scale your service to many more clients with the assurance of best interest
Please reach out to us at firstname.lastname@example.org to see how we may be able to help you with your Reg BI compliance.