SEC REGULATION BEST INTEREST

A modular solution from FIS’ Protegent

2 SEC Regulation Best Interest

ARE YOU READY FOR REGULATION BEST INTEREST?

FIS’ Protegent will prepare you for Reg BI with a complete, modular solution.

From June 30, 2020, the Securities and Exchange Commission (SEC) will require registered broker-dealers to comply with Regulation Best Interest (Reg BI). Under the new rules, firms must show the financial products recommended to retail investors are in the customer’s best interest. Additionally, firms must identify potential conflicts of interest, including the financial incentives for recommending commission-based accounts.

Reg BI applies whenever a securities transaction or an investment strategy involving securities is proposed to a retail customer. Firms will also need to meet the standard’s requirements before opening an investment account or rolling over a retirement account for a customer, even if the account isn’t tied to a specific securities transaction.

Reg BI means meeting four key obligations: disclosure of fees and commissions along with relevant product characteristics, including special or unusual features, before or while making recommendations; exercising reasonable diligence, care and skill in making the recommendation; mitigating and disclosing any potential material conflicts of interest related to the recommendations; and enforcing policies to address them and achieve overall compliance with Reg BI.

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COMPLY WITH REG BI THROUGHOUT THE ENTIRE CUSTOMER RELATIONSHIP

“This action is long overdue; the fact that it is overdue doesn’t make it easier. Delay

has made it more difficult.”Jay Clayton, chairman, SEC

Talking about Reg BI on ThinkAdvisor

Protegent’s comprehensive solution for Reg BI enables firms to consistently meet the SEC’s disclosure, care, conflict of interest and compliance obligations at the pre-sale, point-of-sale and post-sale stages of the customer relationship.

In the constantly changing regulatory landscape, firms are already using Protegent to integrate Reg BI compliance into their processes as a business practice.

To make sure the recommended account types, transactions and strategies achieve compliance, while delivering the right investment outcomes for the customer, the solution provides three, separately available modules:

Pre-sale information gathering

Gather and consider the customer’s relevant financial profile to determine the most suitable account type to establish.

Point-of-sale comparison

Compare product recommendations side by side with other reasonably available alternative products given the customers profile.

Post-sale oversight

Ensure recommendations are carried out correctly and monitor the quantitative suitability of transactions for the customer, in aggregate and over time.

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GATHER INFORMATION AND CONSIDER SUITABILITY PRESALE

To meet Reg BI’s care obligations when opening an account, firms must determine which account type will best match the customer’s requirements and characteristics as an investor. With an online form for fast, easy collection of the data, Protegent will help build an accurate profile of the customer to support the recommendation.

The Profiler uses an analysis engine to determine the suitability of proposed accounts. It also provides a well-documented procedure for compliance under state and federal regulations.

Data collectionA dynamic questionnaire gathers all relevant client data required to help understand the investor’s financial situation, investment objective, risk tolerance, time horizon, experience and overall financial goals.

Account analysis and validationThe Profiler uses an analytics engine to determine the appropriate financial strategy and provides an easy-to-understand scoring system with detailed explanation. Protegent validates predetermined and system-generated suggestions to test the validity of the strategy against the customer’s investment profile. A validation score explains the status of checks. Reps can easily see which strategy is in the best interest of their customer.

DocumentationRegistered reps can document the justification of the accounts selected. All information is kept for historical reference and is reportable.

Specific considerations for 401k rolloversAs part of the presale validation process, the Profiler’s questionnaire will examine the pros and cons of rolling over from workplace retirement savings accounts. With analysis of a full range of factors – including investments in the plan, expenses and services, objectives, risk tolerance and withdrawal advantages/disadvantages – all explained in plain language, firms can compare a customer’s current plan to its own recommendations while satisfying best interest obligations.

Validation with ease of use in mind

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When an account, transaction or strategy is recommended, firms need to clearly demonstrate they are in the customer’s best interest and financial incentives have not influenced any decisions. An important way to validate recommendations, provide full disclosure and address any conflict of interest is to show consideration of reasonably available alternatives.

Protegent will carry out a side-by-side comparison of appropriate products against the customer’s investment profile and document the precise reasons for making a recommendation.

Simplify product validation and comparisonAt point of sale, the Product Wizards provide product-specific validation for annuities, investments and life insurance. These tools help firms determine which of their products are best suited to meet each customer’s needs, objectives and preferences.

COMPARE OPTIONS AND PROPOSE INVESTMENTS AT POINT OF SALE

Product selectionThe wizard helps reps identify which investment platform best meets the needs of their customer – and, when necessary, guides them through the individual product selection. At the end of the process, the selected investments are validated to ensure the sale follows best interest rules, as configured to address current regulations.

Product validationAfter choosing investment products, reps can validate their selection to determine if their proposed sale is in the customer’s best interest. The system is designed to determine if the selected products will meet the customer’s needs and complies with regulatory requirements.

6 SEC Regulation Best Interest

COMPREHENSIVE COMPLIANCE OVERSIGHT AFTER THE SALE

Reg BI’s compliance obligations don’t end at the point of execution. Post-sale, firms must not only ensure the documented recommendations have been executed correctly, but also ensure the trade is still in line with the customer’s overall needs and holdings.

More than ever, firms need an effective enterprise surveillance solution to successfully navigate the increasing challenges that Reg BI presents. As an intuitive, automated supervision system designed to detect, document and help remediate potential best interest violations, Protegent is the premier solution for surveillance on firms’ trade, account and rep information according to regulatory and firm-defined guidelines.

Trade-by-trade monitoringTrade-by-trade monitoring is designed to facilitate T+1 sales practice analysis. A supervisor can view trade blotters, reports, and other information on client profiles, transactions, accounts and reps in order to access suitability-based, ethical and quality-of-practice exceptions. Each trade is subjected to thorough analysis using the Protegent Surveillance rules library. Rules include configurable parameters set by the firm upon implementation. Extensive filtering capability supports focused analysis. Flexibility to dynamically create many different views empowers users to focus on areas of concern and readily respond to regulatory inquiries. Additionally, information captured during presale and point-of-sale can be referenced by users to aid in dispositioning any issues.

Ongoing account and portfolio monitoringCritical to meeting Reg BI requirements, the solution monitors for quantitative suitability – assessing all transactions carried out for a customer over time and ensuring they remain in the customer’s best interest. Account and portfolio monitoring provides compliance personnel with the tools to automate analysis of account conditions – based on historical transaction activity, current positions, balances and client profiles – to measure and rank account risk beyond daily trading activity.

AUTOMATICALLY IDENTIFY REG BI SPECIFIC ISSUES

● Recommendation mismatches

● Missing recommendations

● Missing disclosure for rollovers

● In-and-out trading

● Style drift issues

● Mutual fund share class issues

● Excessive commissions

● Concentration – security, low-priced security, high-yield bond

● Suitability – age, risk tolerance, time horizon

● Mutual fund and UIT breakpoints

● Turnover

● Commission velocity

● Market value loss

● Product switching

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HIGHLIGHTS REP BEHAVIOR

●Concentrations – client, security, industry, product

●Trading activity patterns

●Market value loss

●Production mix

●Commission thresholds

●Profiles issues – missing data, address duplication, frequent change

Identify and manage high-risk registered repsAnalysis at the rep level provides a unique perspective by putting the Registered Representative and their book of business as the focus of attention. This extends beyond trade-by-trade or account-by-account review to a holistic view across the rep's book of business. The outcome is an assessment of the Registered Representative that can help identify existing patterns and potential risk trends across their book of business-related, but not limited to, suitability, fraud, undue risk, sales practices and licensing. Rep Rank analysis results in an aggregate score which highlights reps where multiple small problems that in isolation do not appear to be significant but when viewed in the composite may uncover potential risk exposure. Rep Rank risk scores are compared and reps are ranked against their peers within the firm to determine their overall as well as relative level of risk.

Dynamic reportingReporting and access to data is key to compliance. Protegent’s reporting capabilities helps increase productivity and alleviates resource constraints by allowing access to data and generate reports without the need to go to IT for support. Canned reports as well as the Ad Hoc Report module allow firms to gain efficiencies and become consistent by employing shared business practices through the creation and sharing of reports for compliance, supervisors and risk managers. New for Reg BI is the ability to view all recommendations to aid in investigations and research.

Continual enhancementsAs SEC Reg BI continues to evolve, Protegent will continue to monitor firms’ needs. Feedback from Protegent’s extensive client network and advisory committee are a valuable resource which drive updates such as incorporating new alerts and reporting functions helping firms address their Reg BI obligations and further mitigate internal and regulatory risk.

For more information, contact your Protegent sales or account management representative or email getinfo@fisglobal.com.

About FISFIS is a global leader in technology, solutions and services for merchants, banks and capital markets that helps businesses and communities thrive by advancing commerce and the financial world. For over 50 years, FIS has continued to drive growth for clients around the world by creat-ing tomorrow’s technology, solutions and services to modernize today’s businesses and customer experiences. By connecting merchants, banks and capital markets, we use our scale, apply our deep expertise and data-driven insights, innovate with purpose to solve for our clients’ future, and deliver experiences that are more simple, seamless and secure to advance the way the world pays, banks and invests. Headquartered in Jackson-ville, Florida, FIS employs about 55,000 people worldwide dedicated to helping our clients solve for the future. FIS is a Fortune 500® company and is a member of Standard & Poor’s 500® Index. For more information about FIS, visit www.fisglobal.com

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About ProtegentFIS’ Protegent is a suite of solutions that help automate financial institutions’ compliance processes. Protegent solutions helps financial institutions manage the following industry regulatory chal-lenges: Consolidated Audit Trail (CAT); High-risk & recidivist brokers; senior investors; sales practices and suitability; CIP/AML; Cybersecurity; Market Integrity; Conflicts of Interest; and Social Media. For more infor-mation, please visit www.fisglobal.com/protegent