Enforcement actions can and should be looked at as learning opportunities for financial firms. When the Securities and Exchange Commission (SEC) or other regulatory bodies enforce steep fines and penalties, they expect firms within the industry to pay attention and make note for their own compliance programs.
With that in mind, we’re beginning a new blog series, “what went wrong” in which we’ll cover enforcement actions and what your firm can do to avoid the same mistakes.
Today, we’re focusing on an enforcement action regarding the SEC Regulation Best Interest (Reg BI) rule and what other broker-dealers can learn from this case of noncompliance.
The case: A violation of Reg BI
In June of 2022, the SEC filed its first enforcement action in response to an alleged violation of the Reg BI rule. The SEC alleged a brokerage firm sold $13.3 million worth of high-risk bonds to retirees and other retail investors. The Reg BI rule went into effect in Jun. 2020 and prohibits brokers from placing their own financial interest ahead of their retail customers when making investment recommendations.
According to the SEC, the brokerage firm made several missteps. The firm:
- Didn’t make the due diligence report, which outlined the steps that needed to be followed to determine what bonds should be recommended when, available to broker-dealers and registered representatives. The firm had a due diligence report, but only the chief compliance officer had access to it.
- Didn’t offer broker-dealers and registered representatives up-to-date training on the bonds it offered.
On Nov. 15, 2022, the commission announced it filed 760 enforcement actions and recovered a record $6.4 billion in penalties and disgorgement on behalf of the investing public. The fines associated with the above stated Reg BI enforcement action were included in that total number.
What can your firm do to avoid violating the Reg BI rule?
The case highlights a multiple areas of note within the Reg BI rule. Here are some of the steps your firm can take to avoid making the same (costly) mistakes the brokerage firm made:
- Create a due diligence report to determine what bonds should be recommended under what circumstances and make it available to all broker-dealers and registered representatives at your firm.
- Provide specific and up-to-date training to the broker-dealers and registered representatives at your firm about the bonds your firm offers and under what circumstances they should be offered.
- Write policies and procedures which thoroughly address the Reg BI’s care obligation.
This case was the first of its kind and instructive as to how future Reg BI cases will be handled. This case also provided some insight into what broker-dealers can do to ensure compliance with Reg BI.
Is your firm doing all it can to avoid a compliance violation? Download our “What Went Wrong” infographic for further guidance.