Financial advisers await clarification from the SEC on Reg BI

After 42 small cases involving firms not known in the wealth management space, financial advisers are wondering when the SEC will step up enforcement of its new rule.

The signs that President Gary Gensler’s team foresees, in its wordsensure “that Regulation Best Interest lives up to the promise of its name”, through tougher compliance cases have accumulated since the start of the Biden administration last year. After Gensler hired investor champion for 35 years Barbara Roper of the Consumers Federation of America, state regulatorsthe SECOND and FINRA each found widespread issues with Reg BI compliance.

But 12 settlements that cost an average of $24,000 in civil penalties that the SEC order small RIAs and brokerages to pay last week fell far short of the type of enforcement feared by industry and sought after by consumer advocates. Cases join 30 other Similar penalties under Reg BI have so far levied penalties that would not have much impact on giant wealth managers who can generate up to 10-figure annual profits.

A clearer picture of Reg BI is slowly emerging after the rule was implemented in June 2020, according to Compliance Risk Concepts founder Mitch Avnet. Advisors and wealth managers should view the cases as “a wake-up call for those who need to strengthen their programs” and “a roadmap” for other firms to benchmark their own processes against those of affected firms. , did he declare.

“There wasn’t a lot of clarity about that when we went live,” Avnet said. “There’s still work to be done here from an industry perspective, but I think in terms of where we started and where we’re going, there haven’t been a lot of surprises. Regulators will never tell you how to get from A to B, they will just tell you that they expect you to. … Whenever you have new regulation, there will be a grace period in terms of when regulators start enforcement action.

According to Skip Schweiss, CEO of Sierra Investment Management and board member of the Financial Planning Association, it could be several years before advisors and the industry as a whole realize how Reg BI could ultimately change standards of care. The rule changed brokers’ duty to their clients beyond the prior suitability standard, but the question remains whether it might force the elimination of certain conflicts of interest, he said.

“You have to give this thing five years. You have to see what kind of cases the SEC is going to bring,” said Schweiss, who joined Sierra in October after serving as Managing Director of Advisor Advocacy at TD Ameritrade. “It’s an elevation, but what does it really mean? The industry has complained a lot about [the fact that] there is no real definition of what best interests mean.

SEC officials did not respond to requests for comment. Gensler did not show or play his hand on Reg BI, sharing few details about possible moves in his brief public comments on the rule. This fall, he said the SEC was considering whether Reg BI may need updates in light of new “digital engagement practices” and “gamification” in investing.

“We have significant tools and reviews across the agency to try to ensure that the best interests of regulation means exactly that – when a broker makes a recommendation, it is in your best interest, the public. investor,” Gensler said at an event in October. “We are going to do what we can to make the most of the best interests. And second, we’re also working on these digital engagement practices in the broker and investment advisor space.

The latest set of cases doesn’t really paint a picture in this regard, other than alleging that the dozen companies flouted the rule’s most basic requirement by failing to provide their new customer relationship summary forms to customers. and publish them on their websites. The company that agreed to pay the biggest civil fine of the group at $97,523 – a wealth manager, fixed income trading and execution firm called Wall Street Access – missed the deadline for CRS form about 16 months old, according to to the SEC’s February 15 settlement order.

“With today’s actions, the SEC has now charged 42 financial firms with failing to meet required obligations to ensure retail investors understand their relationships with their securities industry professionals,” said SEC Deputy Chief Enforcement Officer Sanjay Wadhwa in a statement. “We urge companies that continue to fail to meet their CRS form obligations to comply with the law and file a self-report with the SEC.”

Wall Street Access has neither confirmed nor denied the allegations as part of the settlement of the case. Representatives for the New York-based brokerage, one of five firms that agreed to penalties of $97,523 in the 42 CRS form cases, did not respond to requests for comment.

Schweiss considers himself a fan of Reg BI “generally” for raising the previous standard for brokers to act in the best interests of their clients, he said. He sees the CRS form as “a noble enterprise of the SEC” to help clients better understand the differences between brokers and advisers and why the fiduciary standard is stricter than suitability and the new best interest obligation , said Schweiss. Unfortunately, the CRS form “currently blurs the distinction and has the potential to further confuse investors,” he said.

“He doesn’t achieve his goal,” Schweiss said. “The CRS form is one area where, if I had to guess, there will be changes at some point.”