Shahyan Aly is a Black Diamond Product Manager and a licensed attorney. He is the resident compliance expert for users of the Black Diamond® Wealth Platform. With his extensive knowledge of industry regulations partnered with his financial technology experience, he works with wealth management firms of all sizes to make sure they are optimized to efficiently manage their oversight initiatives.
While much of the country eases into reopening, we all have an eye on how the markets will respond. Concurrently, financial advisors are watching the shifting regulatory landscape, which has become even more imperative recently. For broker-dealers particularly, their sights are set on the impending Securities and Exchange Commission’s (SEC) Regulation Best Interest, commonly called Reg BI.
Reg BI is the latest effort to protect retail investors who access investment products and services through broker-dealers. It will require broker-dealers to demonstrate that they are acting in the investor’s best interest when recommending and selling products and services. Even amid the global health crisis, in early April the SEC confirmed it was holding firm on Reg BI’s implementation date of June 30, 2020. This is right around the corner, and most firms are not ready. The SEC has stated that it will consider current circumstances during any enforcement action.
Additionally, there are pending legal challenges around the enforcement date of June 30, 2020. The broker-dealer community has resisted SEC oversight on the grounds that FINRA’s self-regulatory statutes afford investors sufficient, if not even stronger protection. RIAs and some allies in Congress have challenged Reg BI in the belief that it does not carry the same weight as the SEC’s fiduciary standard that RIAs are held to. (That was the intent of the proposed Department of Labor Fiduciary Rule, which the current administration quashed, thus setting the stage for Reg BI.)
Reg BI will require broker-dealers to “exercise reasonable diligence, care, and skill when making a recommendation” to make sure customers clearly understand what they’re buying. Firms must have written policies addressing conflicts of interest, which they must either disclose or eliminate. Recommendations must be accompanied by detailed written disclosures. And, they need to have written policies to ensure compliance with the regulation. In practice, these requirements sound strikingly similar to the RIA fiduciary duty, except that they apply to specific transactions rather than to an ongoing advisory relationship.
When questioned or challenged, broker-dealers must be able to show they were acting in the client’s best interest for a particular transaction. This is where technology plays a critical role. Monitoring tools, secure document storage, archiving, retention, and data manipulation prevention are all key features that help broker-dealers provide an efficient level of oversight. Below I’ve listed out specific features from the Black Diamond Wealth Platform that can be leveraged for Reg BI compliance:
Books and Records: Under the ruling, there is an expansion in books and records maintenance requirements where broker-dealers must be able to demonstrate their compliance with Reg BI. Through Black Diamond’s API suite, the retrieval of this type of information for compliance purposes is automated and secure. Immutable storage (already required by FINRA) can also be connected for the retrieval of client records. With direct access to accounts, portfolios, positions, transactions, cost-basis, and relationship information, reports and client communications firms are able to show the figures for why a particular transaction was in the client’s best interest.
Documented Client Communication: As Reg BI states, hindsight is not a factor in determining whether a broker-dealer acted in the client’s best interest. Broker-dealers need to have records of discussions and decisions from the time they took place in order to prove that at the time of the decision, the investor’s best interests were at the forefront. The Black Diamond Client Experience portal includes a secure Document Vault where signed disclosure documents can be maintained, showing the client received and read any necessary disclosures. Additionally, posting conversation details or meeting notes on a client’s Black Diamond Relationship Timeline creates a date-stamped record showing what was discussed and decided.
Compliance Oversight and Best Interest Monitoring: Black Diamond provides tools for monitoring employee conduct – for example, through a predefined monthly export, a compliance officer can see all the reports employees have run through the system. Each report includes a designation showing whether it includes a manual asset, a manual account, or an alternative investment account, which should be monitored closely for manual modifications. Additionally, by leveraging Black Diamond APIs, firms can retrieve their entire book of business for a given day and store it in an immutable storage medium.
Disable Manual Positions: The Black Diamond team can disable manual positions completely as a precautionary measure to prevent manipulation of position data.
Watermarks and Report Distribution: Reports that are not intended to be shared with clients can include a watermark and a not-for-distribution disclaimer. Any reports that are marked as shared with clients can be sent to the compliance team for review.
Data Mining: Black Diamond’s Data Mining, Monitor Dashboard, and Business Intelligence features provide different views that not only proactively monitor a book of business, but also detect anomalies that require investigation.
As regulatory scrutiny grows across the entire industry, the Black Diamond product team is continuing to build new tools and oversight mechanisms that allow wealth management firms to monitor their business and communicate transparently with clients. I’m looking forward to my continued work on ensuring Black Diamond firms are leveraging the system to efficiently meet the required standard of care.