Engagement Summary
In early 2020, Monticello Consulting Group partnered with the regulatory compliance function within the capital markets unit at a leading bank on their Regulation Best Interest (Reg BI) program. The goal of the engagement was to enhance the standard of conduct for investment recommendations to retail customers by broker-dealers and their registered representatives ensuring that broker dealers act in the “best interest” of their retail customers. Monticello were tasked with demonstrating to the regulator that the bank’s broker-dealer function has a reasonable basis to believe that recommendations are made in the retail customer’s best interest. In order to satisfy this regulator’s request, the broker-dealer was to comply with this overarching obligation and its four component parts:
Disclosure Obligation - Prior to or at the time of a recommendation, the broker-dealer must provide the retail customer, in writing, with a full and fair disclosure of the scope and terms of the relationship, the capacity in which the broker dealer is acting, the fees and costs associated with the services provided, as well as all material facts relating to conflicts of interest associated with the recommendation.
Duty of Care Obligation - The broker-dealer must understand the risks, rewards, and costs associated with the recommendation and exercise reasonable diligence, care, and skill when making the recommendation. In an enhancement to FINRA’s Suitability Rule, which only considers the ‘suitability’ of a given recommendation, the care obligation goes further and ensures that the recommendation is made in the customer’s best interest and the broker-dealer does not place their own interests ahead of the retail investor. If the implementation of this obligation proves successful, FINRA’s Suitability Rule may soon become redundant.
Conflict of Interest Obligation - A conflict of interest is defined as an interest that might incline a broker-dealer, consciously or unconsciously, to make a recommendation that is not disinterested. The Conflict of Interest Obligation requires the establishment of policies and procedures designed to mitigate, prevent, or eliminate conflicts of interest that may create an incentive for a broker-dealer to place their interest above that of the retail customer.
Compliance Obligation - Tackling Reg BI as a whole, the broker-dealer has an obligation to establish, maintain, and enforce policies and procedures that address all components of the regulation and aid compliance with the rule.
Case Study Detail
PROJECT BACKGROUND
The establishment of Regulation Best Interest marked a major milestone for the SEC in their efforts to raise the standard of conduct for broker-dealers. Reg BI was adopted by the SEC on June 5, 2019 (and went into effect starting on June 30, 2020) and will significantly enhance protection for U.S. retail customers, or “two-legged individuals”, who receive recommendations from broker-dealers for the purposes of managing personal, family, or household wealth. Reg BI was designed to place investor interests ahead of the profit motivation of broker-dealers and registered investment advisers. As simple as that principle may sound, there is ample evidence to suggest that broker-dealers and those in investment advisory roles are not fully aware of the obligations they owe retail investors. At the same time, many retail investors are not sufficiently familiar with the standards, conduct, and fiduciary responsibilities their investment advisors are required to follow to protect their interests. Reg BI is centered on fairness and transparency for individual investors, which continues to be an ongoing priority for the SEC.
ENGAGEMENT OBJECTIVES
Change Management
In preparation for a go-live just five months after Monticello started on the engagement, the Monticello team created and managed the overall implementation plan, scope, deliverables, and timeline for the Reg BI program. Partnering cross-functionally with business and technology groups to create a set of new and revised policies and procedures that met the four component obligations of the rule, Monticello ensured the client successfully met its compliance requirements.
Financial Services Advisory
Monticello’s wealth of regulatory and compliance experience combined with its deep technical expertise facilitated the fast-paced development of reports to systematically capture in-scope clients and target counterparty remediation in line with guidance from the SEC. In parallel, the team worked closely with the bank’s FICC and Equities Client Onboarding function to develop a brand new Customer Relationship Summary (CRS) that the SEC required each broker dealer to deliver to retail customers, disclosing summary information about the firm: a “Form CRS”.
BUSINESS VALUE
Monticello Consulting Group provides services across the financial services industry to ensure compliance and reduce regulatory risks. By working with clients to successfully translate complex regulatory requirements into effective business solutions, Monticello enables clients to implement the necessary risk and control framework to ensure industry challenges are turned into opportunities. Our team partnered with Business, Legal, Technology, and Sales & Trading to develop business requirements and oversee the end-to-end execution of a policy and procedure revision and a client onboarding enhancement for the Reg BI program. By leveraging our regulatory knowledge, project management expertise, and proven governance standards, Monticello successfully ensured global trading activity was undisrupted while undergoing a business-critical regulatory initiative.
