Securities Regulation Daily SIFMA hosts roundtable on Reg BI as compliance date approaches
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Thursday, April 30, 2020

SIFMA hosts roundtable on Reg BI as compliance date approaches

By Amanda Maine, J.D.

Participants noted that the SEC has issued guidance on Regulation BI, including documents addressing frequently asked questions and issues examinations staff will be observing.

As Regulation Best Interest’s compliance date of June 30 draws near, SIFMA hosted a webinar featuring industry experts and a representative from the SEC to review frequent questions arising from the Commission’s new rule. Topics included how firms can make a good faith effort to comply with Reg BI by the compliance deadline as issues relating to the COVID-19 pandemic cause firms to struggle, as well as what constitutes a "retail customer" under the rule and what is considered a "recommendation."

Good faith effort. Moderator Michelle Kelley of LPL Financial inquired about what the Commission means regarding the "good faith effort" of firms implementing Reg BI. Lourdes Gonzalez, assistant chief counsel in the SEC’s Division of Trading and Markets, acknowledged that some firms may be struggling to implement Reg BI due to events beyond their control, including issues related to the COVID-19 pandemic. Gonzalez said that the staff will look for evidence that the firm has reviewed and understood the requirements of the rule and has adjusted its compliance programs accordingly.

Gonzalez directed attention to a pair of Risk Alerts recently issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) dealing with Reg BI and how the staff intends to approach exams. She highlighted that the staff will be focusing on the policies and procedures a firm has implemented to ensure compliance with Reg BI. When determining a firm’s good faith effort in complying with the regulation, Gonzalez said that the staff will note if there is a lack of written policies and procedures regarding Regulation BI. Copying and pasting policies and procedures that are not tailored to the firm’s clients or business will also not be considered a "good faith effort" in complying with the new regulation, Gonzalez cautioned.

Guidance. In addition to the OCIE Risk Alerts, Gonzalez recommended that firms consult the SEC’s website addressing frequently asked questions (FAQ) regarding Regulation BI. Gonzalez said that the FAQ answers questions that the staff has received "over and over." However, she noted that some questions directed at the staff have been highly fact-specific, in which case, firms should look to the advice of counsel or seek staff no-action relief where appropriate.

Kelley asked Yoon-Young Lee of WilmerHale if her clients have had to "pivot" based on the SEC’s Regulation BI FAQs. Lee replied that her clients have not had to pivot, but pointed out that there are still questions relating to family offices and whether firms need to treat them as "retail customers" under Reg BI. Kevin Carroll of SIFMA also noted that family offices are not addressed in the SEC’s Reg BI FAQ.

The webinar participants discussed the issue of what is considered a "retail customer" under Regulation BI. Carroll explained that "retail customer" means "a natural person, or the legal representative of such natural person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer; and uses the recommendation primarily for personal, family, or household purposes." He emphasized that under the definition of "retail customer," the customer’s "legal representative" cannot be a financial professional such as a broker-dealer or investment adviser.

Recommendations under Reg BI. Kelley asked about what would be considered a "recommendation" of an investment or product under Regulation BI. Carroll described two scenarios where the Reg BI definition regarding recommendations would not be triggered. The first is the "hire me" scenario where a representative leaves a firm and asks a customer to follow the representative to a new firm. This scenario is already established in FINRA regulations, Carroll said, and Reg BI preserves this type of communication as long as it does not rise to the level of a recommendation.

The second scenario described by Carroll is the "cocktail party/golf course" scenario where a person engages in communication about investing on a casual level. Carroll advised that the SEC’s FAQ addresses ways to have these kinds of conversations without tripping up the "recommendation" definition under Reg BI. This can be avoided by sticking to educational and marketing language, as long as there is not a "call to action" about a specific account type or transaction, he advised.

Gonzalez added that the staff does not view every communication as a recommendation. The setting of the communication does not matter, it is what you are communicating, she said. Gonzalez advised that the more tailored a communication is to a specific customer, the more likely the staff will view that communication as a recommendation.

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