SEC Enforcement Action for Violating Reg BI Standards

The U.S. Securities and Exchange Commission (SEC) filed an enforcement action against a broker-dealer and five of its registered representatives (RRs) on June 15, 2022 for violating certain provisions of Regulation Best Interest (Reg BI). The SEC action asserted that the broker-dealer and its RRs violated Reg BI provisions when they recommended a bond the issuer described as “high risk, not liquid, and only suitable for clients who had substantial financial resources.” Specifically, the SEC cited the broker-dealer with violating the Reg BI care, disclosure, conflict of interest, and compliance obligations.

Regarding the compliance obligation, the SEC noted the broker-dealer had not customized its Reg BI procedures to its business. In addition, the SEC noted that these procedures:

• required RRs to consider reasonably available alternatives but did not provide guidance on how this should be done, 
• did not provide guidance on how RRs should document (evidence) how recommendations were in their customers’ best interest, and 
• did not provide processes for supervisors to follow when conducting best interest reviews of recommendations. 

In addition, the SEC stated the broker-dealer did not properly train the RRs on the risks, rewards, and costs of the specific bond sold. 

The SEC also cited the five RRs for violations of the Reg BI care and disclosure obligations. Among other things, it noted that:

• the RRs were recommending risky and illiquid products to customers with “moderate conservative” and “moderate” risk tolerances,
• their documented best-interest rationales for recommending the bond were “unreasonable, vague, and generic,” and
• they were recommending products which they could not demonstrate that they understood. 

The SEC action seeks permanent injunctions, disgorgement and prejudgment interest, and civil penalties against the broker-dealer and the five RRs based on their violations of Rules 15l-1(a)(1) under the Exchange Act.

Our guidance

Firms should take note of this enforcement action and assess their practices and procedures to confirm:

• Procedures properly address the Reg BI care, disclosure, conflict of interest, and compliance obligations. 
• The firm’s procedures are followed in practice when recommending investments.

How we help

We can help broker-dealers understand the compliance and operational issues presented by Reg BI as they relate to their retail business. Our consultants can assist in designing customized procedures that will detail the steps needed to address Reg BI’s requirements as they relate to your firm.

For more information about Reg BI, or to find out how we can help your firm comply, please reach out to your ACA consultant or contact us here.