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SEC: Reg BI Compliance Should Be Embedded in Compliance Culture | Article

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In a bulletin issued Tuesday, the SEC staff said that compliance with the Investment Advisers Act and Reg BI regarding conflicts of interest is not a “check the box” or “set it and forget it” task, but instead “It’s a steady and continuous process,” he said. to suit each conflict. ”

“All broker-dealers, investment advisors and financial professionals have at least some conflicts of interest with individual investors,” the staff said in a bulletin. “Specifically, any product, service or account that will result in greater revenue or other benefit to the Company or its financial professionals, even if such recommendation or advice is not in the best interest of individual investors. There are economic incentives to endorse the kind, which can create substantial conflicts of interest for both businesses and financial professionals.”

Companies should establish a “culture of compliance,” the staff said. “As it applies to conflicts of interest, create an environment where conflicts of interest are taken seriously and where financial professionals feel empowered and encouraged to take an active role in identifying conflicts of interest. Doing so can greatly reduce the chances of conflicts of interest being properly addressed.”

Reg BI, effective June 2020, requires investment advisors and broker-dealers to “act in the best interests of individual clients” when recommending investment strategies involving securities or securities to individual clients. I am requesting. This strengthens the standards of conduct for broker/dealers beyond existing suitability obligations and clarifies that broker/dealers should not put financial interests ahead of those of their individual clients when making recommendations. is designed to

The SEC has already indicated it intends to step into corporate fires related to Reg BI enforcement, most recently in June against a California-based registered broker-dealer and five of its representatives. and filed a federal lawsuit for alleged violations. policy.

Firms should have policies and procedures in place to monitor existing and potential conflicts of interest and develop plans to mitigate or eliminate conflicts of interest where conflicting advice could harm individual investors. I have. That plan should be evaluated and updated on a regular basis. Especially when the company offers new products, creates new sales targets, or sets other financial incentives for its staff.

Under Reg BI, a company may earn fees, revenues, and profits paid to financial professionals in the form of services rendered, commissions, markups, order flow payments, cash sweep programs, promotional fees or charges. All potential conflicts of interest that arise should be identified. , quotas, sales contests, special prizes, different or variable rewards based on products sold, etc. Competition can also be created by incentives related to ratings and performance reviews, revenue benchmarks, client migration and client retention, Bulletin notes.

The SEC staff recommends against implementing sales targets or other indemnifications that create conflicts of interest, and the compliance department actively monitors “recommendations or ongoing advice that result in additional indemnifications” for potential conflicts of interest. I added that I have to.

In some cases, disputes will need to be mitigated or eliminated, depending on the nature and severity of disputes within each company, the bulletin said.

Once a conflict of interest is identified, it should be disclosed to investors in a manner “designed to enable individual investors to make more informed decisions about our recommendations.” Bulletin said.

Addressing conflicts of interest should not be an annual effort but should be reviewed and revised frequently as business conditions change.

“Firms should monitor disputes over time and regularly assess the adequacy and effectiveness of their rules and procedures to ensure continued compliance with Reg BI and fiduciary standards (investment advisers). We need to,” the bulletin said.