Reviewing brokers’ compliance with conduct rules known as Regulation Best Interest (Reg BI) will be at the top of the U.S. Securities and Exchange Commission’s (SEC) priorities in the year ahead.
The SEC’s examinations division published its compliance review priorities for 2025, setting out the topics it will target in the coming year. It covered both ongoing concerns and emerging risk areas such as fiduciary duty, conduct standards, cybersecurity and artificial intelligence.
For brokers, the SEC said it will continue to target Reg BI compliance, particularly when it comes to:
- making investment recommendations that prioritize clients’ interests;
- avoiding, mitigating and disclosing conflicts of interest;
- reviewing available alternatives; and
- adequately considering clients’ investment goals and account characteristics.
Attention will also be paid to recommendations involving products that are risky, complex, or illiquid — such as highly leveraged or inverse products, crypto assets, structured products, alternative investments, products that have complex fee structures or are based on exotic benchmarks, and products that are growing fast among retail investors.
Additionally, the examinations division indicated it will be looking at recommendations that use automated tools or other digital engagement practices, recommendations involving certain account types such as options trading and margin accounts, and recommendations to older investors or those saving for retirement or post-secondary education.
“Examinations may also focus on dual registrants and encompass reviews of firms’ processes for identifying and mitigating and eliminating conflicts of interest, account allocation practices, and account selection practices,” it said.
In terms of financial compliance, the SEC will be looking at firms’ capital positions, their financial controls, and accounting practices that have been impacted by recent regulatory changes; along with their operational resilience arrangements.
“A focus on broker-dealer equity and fixed-income trading practices remains a priority [too],” the SEC said. “Areas of review will consider the structure, marketing, fees, and potential conflicts associated with offerings by broker-dealers to retail customers, including bank sweep programs, fully-paid lending programs, and mobile apps/online trading platforms.”
Additionally, it will be examining brokers’ execution of retail orders, including the accuracy of order marking, the valuation of illiquid or retail-focused instruments, and compliance with other aspects of the trading rules.
In addition to reviewing SEC-registered brokers, the federal agency also examines registered investment advisers, investment companies, clearing agencies, and self-regulatory organizations. In general these reviews target practices, products, and services that the regulator believes pose a heightened risk to investors, or to market integrity.
“For fiscal year 2025, in addition to conducting examinations in core areas such as disclosures and governance practices, the division will also examine for compliance with new rules, the use of emerging technologies, and the soundness of controls intended to protect investor information, records, and assets,” it said.
“Our 2025 examination priorities identify the key areas of potentially increased risks and related harm for investors,” said Keith Cassidy, acting director of the SEC’s division of examinations, in a release.
“We hope that registrants will evaluate their compliance programs in the areas we identified and make the changes necessary to protect investors and maintain fair and orderly capital markets,” he added.