SEC risk alert highlights areas of deficiencies and examples of weak practices
On January 30, 2023, the Division of Examinations (the “Division”) of the U.S. Securities and Exchange Commission (“SEC”) published a risk alert (the “2023 Risk Alert”) to raise awareness of the most frequently cited deficiencies and weaknesses observed in recent broker-dealer examinations to assess compliance with Regulation Best Interest (“Reg BI”). The 2023 Risk Alert mainly includes observations related to the four component obligations of Reg BI: Compliance, Care Obligation, Conflict of Interest and Disclosure.
The 2023 Risk Alert reflects observations from the Division’s exams coinciding with the implementation of Reg BI. Those earlier exams focused on firms’ establishment of written policies and procedures and effective implementation of those procedures. Many of the observations by the Division are similar to the findings that the Financial Industry Regulatory Authority, Inc. (“FINRA”) published last month in its 2023 Report on FINRA’s Examination and Risk Monitoring Program. As the industry enters the third year of the Reg BI compliance requirement and with more guidance provided by the SEC and FINRA, we expect to see more enforcement activity in this area. As such, firms should review the Division’s observations and consider any potential enhancements to their policies and procedures related to each of the obligations under Reg BI.
The following is a brief summary of key observations in the 2023 Risk Alert.