SEC Reg BI Evolution Raises Industry Questions

Wealth managers still wrap their arms around the best interests of SEC regulation, even as they try to discredit the view that the 2020 rule has failed. changed industry practices.

That was the key takeaway from a May 18 panel at FINRA’s annual conference featuring two industry governors from the Commonwealth Financial Network regulator’s board, General Counsel Peggy Ho and Herold & Lantern Investments Chief Compliance Officer Wendy Lanton, as well as executives from Morgan Stanley and Goldman. Sachs. They spoke a day after SEC Chairman Gary Gensler offered his latest harsh but non-specific warnings to industry and six weeks after an agency note describe Reg BI as “substantially similar” to fiduciary standards.

The memo reflects “a very interesting development” of the difference between advisory accounts subject to fiduciary rules and brokerage services under the adequacy standard before Reg BI, according to Ho, who noted that she felt as if she should apologize to the public for continuing to talk about the subject after over a decade of debate. Recent SEC statements seem to ignore the fact that “you can’t get rid of every conflict,” Lanton said.

“I’m in a small business. What we do is say to ourselves, ‘OK, what are the conflicts that we can get rid of?’ Do we offer proprietary products? No. Do we have representatives who are paid at different levels for different products and services? No,” she said. “These are inherent, but not all conflicts can be resolved. And that, to me, is very worrisome for the industry, because it sounds like what President Gensler was saying – and that’s just my opinion – is that a lot of this is going more towards a community of a fiduciary standard without actually saying, “It’s a fiduciary standard.” We are compensated on the brokerage side, not on a fiduciary basis. And I think that sort of hangs a cloud over things.

The SEC speaks
Gensler, who spoke at the same conference earlier in the week, also responds to state regulators who questioned on the effective impact of the rule and industry experts wonder when the SEC will bring a major case under Reg BI. In a May 17 speech At an event hosted by the North American Securities Administrators Association, Gensler said his staff plans to issue additional bulletins on how the SEC expects financial advisers to consider reasonable alternatives to their recommendations, as well as their costs and risks.

“Under Reg BI and the [R]According to the IA fiduciary standard, when a broker or adviser provides advice, digitally or otherwise, they must act in the best interests of their clients and not put their own interests ahead of those of their clients. he declares. “Dealers and advisers must avoid having their own interests inappropriately influence their recommendations and advice. If they can’t, they have decisions to make – eliminate the conflict, not give advice, or find another way to ensure they don’t put their interests ahead of the investor’s. retail.

Advisors, he added, have “a critical role to play” as companies “take seriously the obligations of investor protection and compliance, limiting or settling any conflict and genuinely providing the best advice in the interests of which investors so much need and deserve”. That, Gensler concluded echoing his other previous commentsis how to “make the most of ‘best interests'”.

If the rhetoric hasn’t added enough uncertainty to the mix for wealth managers asking for the regulator’s stance on whether they should change certain practices and stop selling certain products in particular, the Staff Bulletin previous weeks provided the same.

Reg BI and fiduciary rules for RIAs “are drawn from key fiduciary principles which include the obligation to act in the best interests of the retail investor and not to put one’s own interests ahead of the interest of the investor,” the bulletin said. “While the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the opinion of staff they generally yield substantially similar results in terms of the ultimate responsibilities to the retail investors.

Business Implementation
Executives from companies on the FINRA panel gave more concrete examples of how they have changed their practices under Reg BI, with some admitting that there have been bigger changes than expected in the process. According to Belinda Blaine, head of regulatory compliance strategy for the firm’s Institutional Securities unit, Morgan Stanley’s institutional side was “pretty relaxed about it” compared to the firm’s retail channel. Then they came to the example of private placements, she said.

“Obviously it’s a fine line,” Blaine said. “We would take the legal position that we don’t make recommendations, but we have carefully documented this private placement area because from time to time we will have FAs referring people to our institutional side and we really don’t want to become a retail business, per se. So the documentation there is quite comprehensive in terms of what the client understands and their background etc. So that’s an evolution that I’ve seen on the other side. And it was quite an education.

At Goldman Sachs, the company no longer offers certain products to brokerage clients under Reg BI, said John O’Connell, global head of the firm’s regulatory practice group. Additionally, he created the necessary infrastructure to oversee referrals to potential clients.

“It was a bit of a shift — the idea that you have to make disclosures and make sure the disclosures are sent to prospects before recommendations can be made,” O’Connell said. “It’s important that we have checks, detective checks to make sure people are doing things right. And so we had to build that. We do forensic examinations to try to determine if there are conversations with potential customers or email conversations, at least with potential customers. And then we go back and verify that the disclosure is indeed sent before that happens. So there’s this whole piece as well, in the background, in terms of surveillance.

Commonwealth Financial Network appointed Peggy Ho as corporate counsel last year.

Commonwealth Financial Network

For Commonwealth, the process has been about helping advisors comply with the rule and, specifically, the recent staff bulletin, Ho said. She credits “an incredible partnership between legal compliance and our operations team” for developing trainings and guides, she said.

“You need to know the client and know who they are so you can provide advice in their best interest,” Ho said. “You need to have a way to consider all reasonable alternatives. And, as a company, we’ve tried to provide support so they can do that. You must document yourself. The staff newsletter was very clear, documentation is no longer just best practice. You have to, don’t you? So we’ve worked very hard with our systems and processes to make it easier for our advisors.

Small companies like Herold & Lantern don’t have the technology capabilities available to larger ones when trying to document available alternatives, Lanton pointed out. The biggest lingering problem stems from all the questions that arise when compliance officers and wealth managers read Reg BI and SEC guidelines, she said.

“Ultimately, I don’t think anything new happened,” Lanton said. “Unfortunately, you just read it over and over and over again to get those juicy little bites out of it. But as an industry, we all crave knowledge. That’s why we’re here. We’re here because we care. We are here because we want to do it right.