SEC Amps Up Reg BI Exams

Potential Enforcement Actions

Susan Schroeder, former enforcement chief at the Financial Industry Regulatory Authority who’s now partner and vice-chair of the Securities Department at WilmerHale, stated on the webcast that Reg BI was “predicated in a lot of ways on FINRA concepts, [so] we can kind of look to FINRA enforcement and their playbook” regarding potential enforcement actions.

The first area is a focus on policies, procedures and systems, Schroeder said.

“Reg BI is unusual in that it’s one of the few SEC rules that affirmatively requires reasonably designed systems to achieve compliance,” Schroeder said. “Most of the time, an SEC failure to supervise charge … requires an underlying violation before you can charge failure to supervise, then a reasonably designed supervisory system is a defense to that charge, but the failure to have a reasonably designed supervisory system is not, in and of itself, a violation.”

Reg BI changes that, she said.

“Reg BI makes it an affirmative violation just to have a deficient supervisory system, even if there’s not a single unsuitable recommendation made. That’s similar to FINRA’s Rule 3110. FINRA, for a long time, has been able to bring enforcement cases based purely on what FINRA terms ‘deficient’ supervisory processes.”

FINRA cases have included things like “alleged deficiencies in training, documentation — such as failures to point out specific risks of a given product,” Schroeder said.

Even in the adopting release for Reg BI, Schroeder said, the SEC “was pretty straightforward about the fact that it would not necessarily wait for underlying violations, that the compliance obligation, this affirmative supervisory system obligation, was something that the SEC would be willing bring charges on, in and of itself.”

Another potential enforcement action could be brought regarding Reg BI’s “care obligation,” Schroeder said, “which incorporates, very expressly, the FINRA suitability rule, with some tweaks.”

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