During the first four months that a new investment advice standard has been in place for brokers, financial firms are complying but could be doing more to help their financial advisers understand how to identify conflicts and mitigate them, Securities and Exchange Commission officials said Monday.
The new advice rule, Regulation Best Interest, was implemented on June 30. It prohibits brokers from putting their own financial interests ahead of their clients’ interests when providing advice on investments, including rollovers from employer retirement programs to individual retirement accounts.
The SEC maintained the mid-summer compliance deadline despite the coronavirus pandemic that has forced many brokerages to work remotely since mid-March. The agency said firms should make a “good-faith” effort to comply with Reg BI and a related customer relationship disclosure document for investment advisers and brokers known as Form CRS.
SEC Chairman Jay Clayton said the agency is pleased with what it has seen in initial Reg BI and Form CRS examinations.
“Since June 30, staff have been reviewing firms’ compliance efforts and believe that firms generally are, indeed, meeting their obligations,” Clayton said at an SEC roundtable on Monday. “The staff’s review so far has generally found that firms have made good efforts to meet the content and format requirements of Form CRS, and staff have seen good examples of simple, clear disclosures.”
He again warned, however, that there have been some holes in the Form CRS when it comes to firms owning up to disciplinary problems in their past or in the background of their advisers.
“It is now even more apparent to me that, in the past, this information was not always being brought to the attention of retail investors as it should have been,” Clayton said.
As he often does in public statements, Clayton touted Reg BI as a tougher standard than the previous suitability rule that governed them. He again asserted the new standard of conduct cannot be satisfied through disclosure alone.
Investor advocates, Democratic lawmakers and some state regulators criticize Reg BI as being too weak to protect investors from broker conflicts because it falls short of the fiduciary standard that investment advisers continue to meet.
Reg BI, as it’s known, is a principles-based rule that does not define “best interest” nor does it outline how conflicts should be mitigated. Brokerages can tailor policies and procedures that fit the services and products they offer.
GIVING COMPLIANCE EXAMPLES
SEC and Financial Industry Regulatory Authority Inc. staff who participated in the roundtable said financial firms are updating their policies and procedures to reflect Reg BI. But they’re not providing examples to their financial advisers on how to comply with the measure or how compliance will be achieved.
Firms should focus on “giving registered reps guidance on not just what Reg BI requires but specific examples on how to accomplish the requirements,” Peter Driscoll, director of the SEC Office of Compliance Inspections and Examinations, said at the roundtable.
A firm’s written supervisory procedures should outline “not just that [Reg BI] requirements will be followed but specify who, what, when and how this will be accomplished,” Driscoll said.
Under Reg BI, brokers must consider the costs of the products they recommend and consider reasonably available alternatives — steps that separate the regulation from suitability, according to the SEC.
But the distinction between Reg BI and suitability sometimes is not being made in brokerages’ policies and procedures, SEC and Finra staff said. Reg BI is being substituted for suitability in name but its new approach is not being reflected.
“We’re still seeing some of the materials skewed toward a suitability-oriented process,” said John Polise, the SEC’s associate director for the broker-dealer and exchange examination program. “It is focusing on the risk of the product but not the other BI issues like costs or alternatives, especially with respect to supervision and compliance reviews.”
SHORING UP FORM CRS
The regulators’ staff also said that Form CRS needs to be shored up beyond disciplinary history references. They are seeing shortcomings in the disclosure of fees, costs and revenue sharing and conflicts related to compensation practices.
They also said firms are using text that is too dense of the document, which must be two-pages for investment advisers and brokers and four pages for financial professionals registered as both. In addition, a link to Form CRS must be displayed prominently on a firm’s website and not buried on an interior page.
Financial firms should take another look at Reg BI and Form CRS to see whether they’re doing their best to comply, said Jim Wrona, Finra vice president and associate general counsel.
“It’s always better to be proactive in this space,” Wrona said.
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