SEC expects a “culture of compliance” for Reg BI

Over the last few months, the drive towards transparency and accountability within regulated organisations has been striking. From proposed regulations in the UK and US to hold chief compliance officers and other executives to account, to a new Consumer Duty in the UK, and compliance officer expectations in Europe – there’s no doubt that a “culture of compliance” is no longer a hope, but an expectation.

This idea has been further cemented this week by staff at the Securities and Exchange Commission (SEC) who have set out expectations for adherence with Regulation Best Interest (Reg BI) in a Staff Bulletin concerning conflicts of interest.

Reg BI came into force in June 2020 and sets the standard of conduct for broker-dealers, while the Investment Advisers Act of 1940 sets the fiduciary standard for investment advisers. The Bulletin notes that both regulations “are drawn from key fiduciary principles that include an obligation to act in a retail investor’s best interest and not to place their interests ahead of the investor’s interest”.

While regulatory obligations outlining fiduciary duties are nothing new, the messaging from SEC Staff around Reg BI marks a reinvigorated approach, noting that identifying and addressing conflicts “should not be merely a ‘check-the-box-exercise, but a robust, ongoing process”. Further, it adds that “firms should establish a culture of compliance”, thereby placing a significant burden on firms to implement guidance business-wide, from the top down.

The Bulletin highlights that all broker-dealers and investment advisers will face conflicts of interest with retail investors by the very nature of their role. While the nature of these conflicts will vary, firms must address them all and should put policies and procedures in place to identify, disclose and mitigate them.

What does this mean for firms implementing Reg BI?

The Staff Bulletin notes that it is important for firms and financial professionals to “review their business models and relationships with investors to address conflicts of interest” when considering Reg BI. As well as this, it sets out several mitigation methods, including:

• Avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales of certain products or services
• Minimise compensation incentives that favour one type of account over another
• Adjust compensation for financial professionals who fail to manage conflicts of interest adequately
• Limit the products, transactions or strategies that a financial professional may recommend
• Provide training and guidance

Looking ahead, the Bulletin suggests firms should implement “supervisory procedures to monitor recommendations or ongoing advice” – ensuring that these procedures are not only introduced but adhered to and consistently reviewed. In particular, it notes for Reg BI that “identifying and addressing conflicts is not a “set it and forget it’s exercise” and firms will need to monitor it over time to ensure that their policies and procedures are both adequate and effective.

CUBE comment

The SEC’s latest Staff Bulletin for Reg BI is yet another rung in a ladder leading to a more transparent, consumer-centric, fairer financial services industry.

In the UK, the emergence of the Senior Managers and Certification Regulation (SMCR) set the foundations. Since then, we have seen proposals from global, federal and state regulators that look to ensure compliance is embedded organisation-wide and holds compliance officers and senior managers personally accountable where it fails.

There could be a number of triggers for this new approach to compliance. With increasing regulatory scrutiny paired with emerging technology, regulators likely are considering new means of enforcement. Holding corporations to account – the tried and tested approach – isn’t always effective. Often, punitive fines are only a drop in the ocean for global financial institutions (though the reputational damage can be more crippling). Instead, regulators are looking beyond the corporation to the individuals inside – those that are responsible for the way it operates.

As we see a greater push toward transparency and accountability through regulations such as Reg BI, we also see a raft of enforcement actions against individuals.

A Wall Street Journal report recently noted that cryptocurrency compliance officers, in particular, are worried that without clear rules they will be held personally responsible for failures at their company. Looking at recent regulatory messaging and enforcement, this concern isn’t unwarranted. While regulators will be sensible with their approach, they will hold individuals to account where they failed in their role to ensure company-wide compliance. There is a way to avoid personal liability for non-compliance, however, which is to comply.

Compliance officers who have done all they can to make regulations from inception, analyse them and implement them across all business areas, will not face the wrath of the regulator. If this seems like a difficult task for one team alone, technology can help.

CUBE takes regulations and regulatory content, such as Reg BI, from across the globe, makes sense of it, and automatically maps it to customers’ existing policies, procedures and controls. It makes compliance teams’ lives far easier – and could save you sleepless nights.

Do you know your regulatory expectations for Reg BI?