Initial Reg BI implementation procedures
As the official Regulation BI (“Reg BI”) June 30 effective date came and went, firms prepared disclosure documents and client communications to be in compliance with the new rule. Because Reg BI had evolved over a long period of time, most firms were on target with their implementations and ready on day one.
However, post-implementation management for a new regulation can be a different story. Firms are typically focused on having the client-facing implementation pieces nailed down for the registered representatives first. Compliance and supervision for post-implementation is often a day-two consideration. So, after all the high-fives and the congratulatory emails are received on the go-live date, those in charge of compliance and business supervision will say, “Now that the implementation is over, the real work begins.”
Reg BI seems to be no exception.
Less than three months in, it is hard to determine exactly where most firms are with their post-implementation compliance and supervision programs regarding Reg BI. Some firms have not changed their electronic communication programs yet but are working toward it and/or discussing the implications. Other firms’ initial lack of response, however, may indicate that they are still thinking- through how to change their programs to include a Reg BI focus in an early or pre-planning stage.
Electronic communications compliance and supervision programs
Some financial organizations have implemented layers of disclosure documents for new customer relationships, advertising materials, conducting transactions, and individual communications. They’ve finalized policies, procedures and firm training. The next steps are e-communication compliance and supervision programs that include Reg BI-specific surveillance. More specifically, consideration is being given to the following:
- Required disclosure documents at account opening, first recommendation of security or strategy (e.g. 401k rollover)
- Alternative securities to be offered or linked thereto, at time of transaction
- Firm-approved disclosures and Form CRS links in advertising and marketing pieces
- Security recommendations and account monitoring statements
- Undisclosed Conflicts of Interest
- Security product sales contests
Additionally, firms are using these tools to enhance their e-communication compliance and supervision programs:
Lexicon review for Reg BI. Revising their existing lexicon list to ensure compliance with Reg BI and their associated policies and procedures, based on their business model and disclosure document wording.
Targeted training for electronic communication reviewers. Most Reg BI training has been general for the firm or targeted to the front office. Specific training is now being formulated for the e-communication reviewers. This training provides scenarios and examples of potential non-compliance with Reg BI, such as communications at each layer of customer disclosure. This requires an understanding of firm-approved disclosures at each layer and a general understanding of recommendations under Reg BI (if general training has not already covered this aspect).
Reg BI governance committee. A core group of personnel responsible for implementing regulation will need to meet periodically to ensure compliance. There should be representatives from compliance, legal, marketing and business supervision. Reg BI discussion items should include:
- Issues encountered via surveillance
- Changes to firm policies or requirements
- New regulatory guidance
- Any changes that IT representatives are using or are used behind the scenes to comply
- Exam and enforcement updates, including simple things like disclosure links breaking
What to consider for best Reg BI results
E-communication compliance and supervisory personnel who are trained specifically for Reg BI scenarios and understand how representatives are required to be compliant when recommending securities will ensure more specific lexicons targeted for Reg BI. A deeper understanding of Reg BI requirements and the procedures your firm’s registered representatives must follow. This, coupled with more focused lexicons, can yield better results than if these practices are not employed.
Firms that enhance their day-two e-communication compliance and supervision programs should fare much better in regulatory exams and inquiries because they will have proactively identified and corrected issues as they occurred.
At this early stage, it is usually only firms that have serious and glaring deficiencies in their compliance and supervision programs that end up getting fined and censured. Not until later in the regulatory audit process for new regulations, such as a firm’s second exam, do regulators look more closely and refine their expectations of a compliant program. At this stage, they discipline more firms for smaller deficiencies.
Firms that employ best practices, such as the recommendations above, will benefit from sustainable, early detection and correction, regardless of regulatory scrutiny level.
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