Moving Forward with RegBI – Communicate Early and Often

This was contributed by David Ackerman, Esq. of Nice Actimize

In a bold move, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton announced in a published statement that Regulation Best Interest deadline of June 30, 2020 remained “appropriate,” indicating that the regulation will proceed with the planned implementation date. Despite tremendous pressure to delay imparted by industry lobbyists, professional organizations, and opinions within the SEC staff itself, Chairman Clayton opted to state that although COVID-19 has rocked the financial services industry, “the law continues to apply.”

This approach surprised many in the industry. At this point, many firms are in the final stages of transferring operations to a work-at-home or other new environment, and only now can shift their focus back towards enhancing compliance protocols. Most long-term implementation projects, if not all of them were placed on hold for an indefinite amount of time. As one can imagine,  Regulation Best interest was ostensibly one of those items placed toward the bottom of priority lists.

Chairman Clayton explained, “Firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances… SEC examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI.”

Given current uncertainty and challenges shaped by COVID-19, three “lessons learned” may guide firms daunted by the renewed significance of tackling Reg BI Compliance.

Cloud Provides Flexibility 

First and foremost, any technological changes implemented must consider a cloud-first approach.  Even now, many firms struggle with persistent logistical challenges created by on-premise solutions, such as network capacity, VPN overload, and performance lag. Cloud solutions enable flexibility for business continuity plans and for general business operations once we are past the current uncertainty. Given that Reg BI anticipates affecting over 57 million American households invested in the US securities markets, geographical flexibility is paramount for robust compliance programs.

Additionally, many firms grappled to surveil a spike in trading volume at the same time their entire workforce was displaced. As a direct result, the alert quality and efficiency of the review process was dramatically impacted. Antiquated review processes relying on volume as opposed to alert quality will consistently fall prey to capacity constraints.

To combat this phenomenon, firms must not simply depend on more data, or large volumes of segregated alerts, but instead enrich their surveillance program by incorporating better correlations of numerous data types. Alerts generated off trade data alone can only ascertain a portion of the full story. Whereas trade data, combined with client email and text communications, and combined with CRM notes will raise true Best Interest concerns to the top of the pile allowing for improved triage of compliance risk.

Engaging with Regulators When Facing Challenges 

Lastly, regulatory agencies worldwide encourage firms to communicate when experiencing difficulties, particularly due to COVID-19.  Most regulations in the modern era are based on reasonableness, which is not a bright line drawn in the sand.  What is considered a reasonable measure can be influenced by the openness a firm has with its regulator. Chairman Clayton reiterated this sentiment stating, “[t]o the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19… the firm should engage with us.”

All market participants effected by COVID-19 and Regulation Best Interest should work closely with the SEC on these measures and continue to move towards full compliance.  It is only through enhancing the public trust, innovating our approaches, and adapting to the new normal, that the markets may finally find the strength to forge a path forward.