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Rex Gooch | vice president of product strategy, FIS
May 21, 2020
In the turmoil of the global pandemic, regulators have pushed back the effective dates of a number of coming mandates. But when it comes to Regulation Best Interest (Reg BI), the U.S. Securities and Exchange Commission (SEC) stands firm.
Now, in the search for solutions, are broker-dealers being just as rigid about their own processes?
There are good reasons for the SEC to stick to its guns about Reg BI. It’s a long-awaited set of rules that’s been under discussion for around 15 or more years, in a drive to bring together existing fiduciary standards for investment advisors and suitability standards for broker-dealers. Most importantly, Reg BI promises to protect investors – a commitment that the SEC takes seriously and wants to uphold without delay.
That’s why in a public statement about the impact of COVID-19 on the implementation of Reg BI, SEC chairman Jay Clayton said, “We believe that the June 30, 2020 compliance date for Reg BI and other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate.”
In short, broker-dealers have little choice but to get their processes in order fast – and make sure they can meet Reg BI’s disclosure, care, conflict of interest and compliance obligations.
Under the new rules, firms must show that the financial products they recommend to retail investors are always in the customer’s best interest. They must also identify potential conflicts of interest, including any compensation they might earn on an account.
Technology and automation is one of the best ways to do that, which can both capture and demonstrate the fact that your firm is fulfilling its obligations to the regulation. With recommendations specifically, looking at your firm’s sales process from the pre-sale, point-of-sale and post-sale stages of the customer relationship helps determine where you have gaps and what changes are needed to provide evidence of review. But to get the best from a solution in a timely way, you may need to adapt your processes first.
Although technology is clearly needed to meet increasing needs, you shouldn’t always try to bend it to your way of doing business. Modify it too much and you’ll have transformed an off-the-shelf solution into custom technology that ends up being expensive to develop, implement and maintain.
But it’s not all about costs. While compliance functions are expected to do more with less, you have to demonstrate a reasonable basis for implementing certain standards, policies and procedures. A firm must cover its basis and if possible, not have anything stand out. In the case of a mandate like Reg BI, where possible, you want to adapt your processes and leverage industry-standard technology. The most expert vendors develop solutions strictly to follow industry best practice – and while changing their processes certainly addresses your unique needs, it also means adding additional complexity and overhead which can stretch your resources even more.
For many, compliance is about blending in: You need to toe the line and do the same thing as your competitors.
So, while the SEC can be as unbending as it likes about enforcing Reg BI, broker-dealers should ideally yield to the best practices of their RegTech.
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