On episode 105 of the CCO Buzz podcast, Sr. Compliance Consultant Matthew Rothchild takes a look at the SEC’s Risk Alert, Observations from Broker-Dealer Examinations Related to Regulation Best Interest (“RBI”) and discuss its applicability to Investment Advisers.
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CCO Buzz: Hello and welcome back to the CCO Buzz. As we round out Q1, how’s updating your firm’s Annual Amendments going? I know here at Core Compliance our team is busy assisting clients meet the deadline at the end of the month. But as we all had our heads down- focusing on the fast-approaching deadlines- the SEC snuck in, and issued a bit more guidance than we expected.
Before the highly anticipated Examination Priorities, the SEC released guidance via a Risk Alert in late January, titled “Observations from Broker-Dealer Examinations Related to Regulation Best Interest (“RBI”)’.
Now listeners, we’re in for a treat today, as we are joined by a new team member of the Core Compliance Team, Senior Compliance Consultant Matthew Rothchild. Matthew joins us today to discuss his Risk Management Update article, “Regulation Best Interest: Considerations for 2023,” which, you guessed it, covers a bit of insight for firms on how to unpack and apply the latest guidance from the SEC.
With that, let’s begin…
First off, hello and welcome to the CCO Buzz Matthew! Or is it, Matt? Can I call you Matt?
MR: Yeah you can call me Matt.
CCO Buzz: Alright, hi Matt! Welcome to your first episode of the CCO Buzz and thank you for joining us today.
I have to say your article is a profound, enjoyable, and an overall, easy read, which I’ll even admit, is difficult sometimes in our industry.
What I found most interesting about your article is that, right from the jump, you nip it in the bud and say “just because the Risk Alert says Broker-Dealers doesn’t mean that it doesn’t apply to Investment Advisers” which I love and is so true when it comes to regulatory guidance.
MR: While the title of the Risk Alert is based on Broker-Dealer findings, the foundational ideas of RBI can and are a mirror to the Fiduciary Duty standards for investment advisers. And, because of the crossover, I would not, nor should investment advisers, be surprised if the SEC also applies similar, if not the same topics, from these RBI examinations to its investment adviser examinations program.
CCO Buzz: Alright, so how should an RIA or a Broker-Dealer prepare?
MR: Well, the Risk Alert focused on four obligation areas the disclosure, the care, the conflict of interest and the compliance obligation. In my review, I did note that the fourth focus area lacked references to any failures found within examinations.
CCO Buzz: Ok, in your article, you unpack each obligation in a very interesting approach that I’ve yet to see in any of Core Compliance’s Risk Management Updates. While you do provide best practices for any firm to consider implementing, you allow the reader a moment of self-assessment and reflection. In a sense, asking a critical question regarding their compliance program.
So how about we try something similar, but different, on this episode of the CCO Buzz? Instead of me asking you for a taste or a sample of insight for listeners, how about we revisit a few sections of your article and I ask you the key questions firms may want to assess.
Sound like a plan?
MR: Yeah!
CCO Buzz: Great! Matt, regarding the disclosure of obligation focus – you encourage firms to evaluate their policies and procedures (or P&P manuals), regarding Form CRS. One question you pose is, Does your manual specify the circumstances under which Form CRS should be updated? How would a firm address this within their P&Ps?
MR: Yeah so, any firm could present this in a multitude of ways within their manual, but simply put, your manual could say that Form CRS will be reviewed annually and updated if needed or when a material change to the business occurs. Now of course, if your firm feels that more frequent review is necessary, then incorporate that into the Manual.
CCO Buzz: Ooh, this is fun! Alright, next focus of the Risk Alert is the Care Obligation, which correct me if I’m wrong, deals with an Investment Adviser Representative’s (“IAR”) business conduct with respect to a retail client in the investment advisory relationship.
MR: Well yes, I couldn’t have said it better myself, but I do want to add that within the investment advisory space, there are specific implications when recommending something like a qualified plan-to-IRA rollover or an IRA-to-IRA transfer transactions.
CCO Buzz: Ok, noted. Does your manual create a framework for comparing alternatives or considering costs, but nor require its use? Wait, I’m confused… could you elaborate on this?
MR: Yes of course. So, when reviewing their P&P manual, a firm should understand that no matter how great the system is that you’ve built, it will only be as effective as the application and it’s use. So, if you don’t execute it properly, you shouldn’t expect the best results. But one method to address this within a P&P manual would be that if your firm has designed a specific tool or a form or some other means by which to comply with your firm’s obligations, then include that requirement in your Manual, as well as support usage requirements such as periodic testing.
CCO Buzz: Ah, ok, now I get it now. So, the third section you cover is the Conflict of Interest Obligation. When it comes to this obligation, firms are required to create policies and procedures to mitigate or eliminate conflicts of interest. So one of the many questions you posed in your article – does your manual stay too generic in addressing conflicts and not highlight examples unique to your firm?
MR: Yes, I recall this one… so when it comes to this question firms should be assessing the specificity of their P&P Manuals. When it comes to disclosing conflicts being specific is critical, as the strength of the disclosures make the foundation of how potential clients decide whether to engage.
Best practice is to just be honest and specific about any and all conflicts up front. So, firm’s will want to review their materials that discuss conflicts. A good question to start – Do any of the conflict disclosures contain language where a first-time reader would not be able to articulate, understand, or describe its effect on the advisory relationship? If you find that is the case, then it should be revised to be made more specific.
CCO Buzz: Got it, is there anything else you’d like to add?
MR: Yes, actually there is. So, in my article I bring up the importance of training and testing. Within the Risk Alert the SEC provided a few take aways regarding the maintenance of strength for any firm and what it could potentially look like. The team at Core Compliance continuously offers their clients mentorship and training opportunities when it comes to program enhancement. When it comes to the Care, Conflict of Interest, and Disclosure Obligations IARs also must be reminded of any roles that they would have in updating and/or delivering Form CRS; the necessity of analyzing costs, investment alternatives, and documenting rationales for recommendations for qualified plan rollovers and IRA-to-IRA transfers; and how to recognize and address conflicts of interest. These are all things that IARs need to be mindful of, so training and really inculcating their minds to be oriented in this direction is very important.
For more information, or to discuss how the team at Core Compliance can help you and your firm address the findings within this article, contact us at info@corecls.com or by phone at (619) 278-0020.
CCO Buzz: Thank you so much for joining us today Matt.
CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.
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