OCIE Risk Alert—Examinations Focused on Initial Compliance With Regulation Best Interest

As firms work to prepare their updated disclosures and move toward compliance by June 30, 2020 with the new Regulation Best Interest (“Reg BI”), the Securities and Exchange Commission (“SEC”) made two important announcements.  As a reminder, Reg BI establishes a new standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer.

First, in an April 2, 2020 public statement, SEC Chairman Jay Clayton made clear that compliance dates would not change despite the global COVID-19 pandemic.   The SEC realizes that many firms have spent significant time preparing for Reg BI since it was announced last year, and believes that, in general, the resources and effort devoted toward implementation of Reg BI did not require a broadly applicable extension.  However, the SEC also acknowledges that COVID-19 has materially impacted some business.  Chairman Clayton’s statement made it clear that, while firms should make a good faith effort to achieve full compliance with Reg BI by June 30, 2020, if a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, the firm should engage with the SEC, and that SEC examination staff was expected to consider firm-specific effects of the global pandemic (and related operational constraints and resource needs) in connection with examination and enforcement efforts.

The SEC has said that, for the time being, they plan to conduct examinations without the traditional on-site component to protect firms and SEC officials. That being said, it may be the case that on-site examinations will resume after COVID-19 restrictions are lifted, so firms should not materially deviate from their normal exam preparation steps.

Second, on April 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a risk alert (“Risk Alert”) about Reg BI providing information about the scope and content of initial examinations on the topic.  It should be no surprise that examinations will focus on the four component obligations of Reg BI: the Disclosure Obligation, the Care Obligation, the Conflict of Interest Obligation and the Compliance Obligation.  The Risk Alert is mandatory reading to better understand the SEC’s expectations and focus regarding this fundamental change to the financial industry. 

Notably, the SEC has made an effort over the past several years to educate industry participants through risk alerts and other educational pieces (see, e.g., the Reg BI Small Entity Compliance Guide). Such documents provide baseline guidance for firms, and the SEC will likely take a critical look at firms that fall short of the basic levels of compliance outlined in the SEC guidance.


Jacko Law Group, PC Stands Ready to Assist Firms with Regulation BI Compliance

If your firm needs assistance to reach compliance on Regulation BI, know that Jacko Law Group, PC is prepared to help. Our firm will evaluate your unique situation and look for solutions to help your shore up any remaining compliance issues by the compliance date, ensuring you’ll feel prepared for examination.

Contact us today to discuss your options.

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