The report is 42 pages long, but here are the highlights. If you need assistance addressing any of these issues, contact Sallah Astarita & Cox, LLC, a national securities law firm comprised of former SEC Senior Enforcement Attorneys and Outside Counsel to dozens of RIAs and BDs. Call 212-509-6544 to schedule an appointment.
Regulation Best Interest
Regulation Best Interest established a new
standard of conduct for broker-dealers and
associated persons of a broker-dealer. Regulation
Best Interest requires broker-dealers and natural
persons who are associated persons of a broker
or dealer to act in the best interest of their retail
customers when making a recommendation of any
securities transaction or investment strategy involving securities without placing
their financial or other interests ahead of the interests of the retail customer. This
general obligation is satisfied only if a broker-dealer complies with four-component
obligations: a Disclosure Obligation, a Care Obligation, a Conflict of Interest
Obligation, and a Compliance Obligation. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. The
Division will prioritize examinations to assess compliance with Regulation Best
Interest.18 Initial examinations previously undertaken focused on the processes
broker-dealers relied on to implement Regulation Best Interest.
RIA Fiduciary Duty
The Division will continue to examine RIAs to assess
whether, as fiduciaries, they have fulfilled their duty of care and duty of loyalty.
This will include assessing, among other things, whether RIAs provide advice,
including whether account or program types continue to be, in the best interests
of their clients, based on their clients’ objectives, and eliminate or make full and
fair disclosure of all conflicts of interest which might incline RIAs—consciously or
unconsciously—to render advice which is not disinterested such that their clients
can provide informed consent to the conflict. The Division will continue to focus
on risks associated with fees and expenses, complex products, best execution, and
undisclosed or inadequately disclosed, compensation arrangements.
Fraud, Sales Practices, and Conflicts
Examinations will
focus on the appropriateness of recommendations and advice provided to retail investors,
with a particular emphasis on: (1) seniors, including recommendations and advice made
by entities and individuals targeting retirement communities; (2) teachers; (3) military
personnel; and (4) individuals saving for retirement.
Additionally, the Division will concentrate on recommendations regarding account type,
conversions, and rollovers, as well as the sales practices used by firms for various product
types, such as structured products, exchange-traded products, real estate investment trusts,
private placements, annuities, digital assets, municipal and other fixed income securities,
and microcap securities. In addition to the recommendation of complex products, the
Division will examine broker-dealers to assess whether they are meeting their legal and
compliance obligations when providing retail customers access to complex strategies,
such as options trading, and complex products. The Division will also focus on how
firms are complying with the recent changes to the definition of accredited investor when
recommending and selling certain private offerings.
Retail-Targeted Investments
The Division will continue to prioritize examinations of issues regarding products that are important to retail investors, including Mutual Funds and Exchange-Traded Funds (ETFs), Municipal Securities and Other Fixed Income Securities and Microcap Securities,
Anti-Money Laundering
The Division will continue to prioritize
examinations of broker-dealers and registered investment companies for compliance
with their AML obligations in order to assess, among other things, whether firms have
established appropriate customer identification programs and whether they are satisfying
their SAR filing obligations, conducting due diligence on customers, complying with
beneficial ownership requirements, and conducting robust and timely independent tests
of their AML programs. The goal of these examinations is to evaluate whether broker-dealers and registered investment companies have adequate policies and procedures
in place that are reasonably designed to identify suspicious activity and illegal money laundering activities.
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Sallah Astarita & Cox, LLC is a national securities law firm comprised of former SEC and Broker-dealer attorneys, representing firms and brokers in SEC Examinations and Investigations across the country. For more information contact the firm at 212-509-6544 or send an email to mja@sallahlaw.com
