5 Ways BDs Fail to Meet Reg BI Care Obligation: SEC

Both the Financial Industry Regulatory Authority's Examination and Risk Monitoring Report, released in January, and the Securities and Exchange Commission's just-released risk alert zero in on the Care Obligation in the SEC's Regulation Best Interest, according to a Wednesday briefing by InvestorCOM, a software provider. Reg BI's Care Obligation requires broker-dealers to exercise reasonable diligence, care and skill when making a recommendation to a retail customer. The SEC's Jan. 30 risk alert pointed to areas where some broker-dealers lacked written policies and procedures reasonably designed to achieve compliance by their financial professionals with the Care Obligation. Reg BI includes four pillars — the Care Obligation, Disclosure, Conflicts of Interest and Compliance. Before Reg BI, brokers were only required to analyze whether a recommendation was "suitable" for investors, but now brokers must analyze whether the security is in the "best interest" of the investor. Issa Hanna, a partner at Eversheds Sutherland, told ThinkAdvisor that the guidance in the Risk Alert is "pretty underwhelming, which is unfortunate given that the Care Obligation presents some of the thorniest interpretive issues under Reg BI." For instance, the SEC staff provides "no guidance regarding the specific factors that a firm should take into consideration during a reasonably available alternatives analysis. Instead, the alert just faults firms for not providing specific guidance to RRs regarding what a reasonably available alternatives analysis should look like. "Perhaps we shouldn't be surprised that the Risk Alert does not get into this interpretive exercise, given that the Division of Exams (which authored the alert) is not really in the business of interpreting Reg BI, but rather just examining for compliance with it. It's an important nuance to appreciate when reviewing this type of guidance." See the gallery for five examples of policies and procedures as set out in the Risk Alert that may contain deficiencies or weaknesses related to compliance with Reg BI's Care Obligation, as explained by the SEC.