SEC targets best-interest rules in broker reviews

By James Langton | October 16, 2023 | Last updated on October 17, 2023
2 min read
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Compliance with best-interest rules will be the U.S. Securities and Exchange Commission’s (SEC) top priority in its reviews of broker-dealers in the year ahead.

The SEC’s examinations division published its priorities for 2024, which sets out areas the regulator intends to focus on in its compliance reviews.

For brokers, the rules known as Regulation Best Interest (Reg BI), which sets conduct standards for firms when recommending trade or investment strategies to retail investors, is the division’s top priority.

These reviews will focus on conflict of interest disclosures, conflict mitigation, and firms’ processes for assessing alternative investments.

The SEC said it will also focus on complex products, such as derivatives and leveraged ETFs; high-cost or illiquid products; proprietary products; and microcap securities.

“Examinations may also focus on recommendations to certain types of investors, such as older investors and those saving for retirement or college,” it said.

Along with Reg BI, the SEC’s compliance exams of brokers will review firms’ relationship disclosure practices; compliance with financial controls; and brokers’ trading practices, particularly compliance with short-selling requirements, alternative trading system rules, and order routing and execution practices.

Firms’ exposure to cryptoassets and their use of technologies, such as mobile apps and automated advice, is also a priority.

In the investment adviser segment, the SEC will focus on firms fulfilling their fiduciary duties to investors, disclosure and marketing practices.

“The division remains focused on advisers’ compliance programs, including whether their policies and procedures reflect the various aspects of the advisers’ business, compensation structure, services, client base, and operations, and address applicable current market risks,” the regulator said.

The division also set out its priorities for the other industry segments that it reviews, including securities exchanges, self-regulatory organizations, investment firms, clearing agencies, and other types of market players.

For the industry overall, the SEC said it will examine information security and operational resiliency, compliance policies and procedures, and anti-money laundering requirements.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.