It’s Your Duty

In 2025, the Securities and Exchange Commission (SEC) continues to emphasize the enforcement of Regulation Best Interest (Reg BI) and the fiduciary duties of Registered Investment Advisers (RIAs). Introduced on June 5, 2019, Reg BI established a "best interest" standard for broker-dealers, superseding the previous suitability requirement. This regulation mandates that brokers, dealers, and investment advisers prioritize their clients' interests and transparently disclose any potential conflicts.

The SEC's Division of Examinations has outlined its 2025 priorities, focusing on perennial and emerging risk areas, including fiduciary duty, standards of conduct, cybersecurity, and the use of artificial intelligence in advisory services. This initiative aims to ensure that firms adhere to their obligations, especially concerning Reg BI and fiduciary responsibilities.?

The SEC employs several strategies to enforce Reg BI and fiduciary standards:

Inspections and Examinations: The SEC conducts routine and targeted examinations of RIAs and broker-dealers to assess compliance. These reviews scrutinize firms' policies, procedures, records, and communications related to Reg BI. Non-compliance identified during these examinations can lead to penalties, fines, or legal action.

Enforcement Actions: Beyond examinations, the SEC initiates enforcement actions against firms and individuals violating Reg BI. Such actions may result in substantial fines, disgorgement of profits, and other sanctions. Since Reg BI's inception, numerous enforcement actions have underscored the SEC's commitment to investor protection.

Common Compliance Pitfalls

Firms often encounter challenges in the following areas:

Disclosure of Conflicts of Interest: Reg BI requires firms to disclose any conflicts that might influence their recommendations. This includes financial incentives tied to specific products or services. Failure to provide clear and comprehensive disclosures can lead to significant penalties.

Due Diligence on Recommendations: Firms must have a reasonable basis to believe that their recommendations align with clients' best interests. This necessitates thorough research and analysis of products and services. Inadequate due diligence not only breaches Reg BI but also undermines client trust.

Policies and Procedures: Establishing, maintaining, and enforcing written policies and procedures designed to ensure compliance with Reg BI is mandatory. Firms lacking robust compliance frameworks risk enforcement actions and reputational damage.

The SEC's 2025 examination priorities highlight an increased focus on how firms integrate artificial intelligence into their services. While AI offers potential benefits, it also presents unique challenges related to fiduciary duty and compliance. Firms are expected to implement rigorous oversight to ensure AI-driven recommendations meet Reg BI standards and genuinely serve clients' best interests.?

To align with the SEC's expectations:

1. Enhance Disclosure Practices: Regularly review and update disclosures to ensure they are clear, concise, and comprehensive, enabling clients to make informed decisions.
2. Strengthen Due Diligence Processes: Implement systematic procedures for evaluating the suitability of products and services, ensuring they align with each client's unique financial situation and objectives.
3. Develop Robust Policies and Procedures: Create and maintain detailed compliance manuals that address all aspects of Reg BI and fiduciary duties, including the oversight of emerging technologies like AI.
4. Continuous Training and Education: Invest in ongoing education for staff to stay abreast of regulatory updates and best practices, fostering a culture of compliance and ethical conduct.

By proactively addressing these areas, RIAs and broker-dealers can not only mitigate the risk of regulatory scrutiny but also enhance client trust and position themselves as leaders in ethical advisory services. If you'd like to read more about this topic, then check out our blog post here.