While the Department of Labor was busy putting the finishing touches on its rule to retool the definition of fiduciary under ERISA and sending it off to the Office of Management and Budget for review in late January, regulators for the BD and advisory industries unleashed their exam priorities for the new year.
Like DOL, the Financial Industry Regulatory Authority said that it would focus on reining in brokers' conflicts, while the Securities and Exchange Commission said it would zero in on the retirement planning services that advisors and BDs offer their clients.
"We completely agree with DOL that those [BD] conflicts are real and they need to be addressed, and that firms have failed in managing their conflicts on too many occasions," Richard Ketchum, FINRA's chairman and CEO, told IA in an early January interview to discuss the release of the self-regulator's 2016 regulatory and exam priorities.
Once at OMB, industry officials anticipate DOL's fiduciary rule (also known as the conflicts of interest rule) could likely be put through an expedited review — not the typical 90-day OMB review — which means that the final rule could be out before April.
While Ketchum noted that FINRA "disagreed in details" with the DOL's proposed fiduciary rule and "tried to provide constructive comments that identified potential changes, [FINRA] certainly agrees with the basic concern that firms have to be able to manage their conflicts that relate to compensation incentives," he said. "That's a huge focus of our program."
Specifically, brokers' conflicts as they relate to "both the provision of advice and the recommendation of products to customers," as well as the differential commissions and incentives that their registered reps receive, "are a real concern," said Ketchum, who could retire from FINRA as early as this summer (see sidebar, page 12).
He noted that potential problems can crop up in the sale of proprietary products as well as in the sale of "higher-commission products, whether that be in higher-cost mutual funds or the traditionally higher-cost products like direct REITs and private placements."
Meanwhile, Back at the SEC …
The SEC's Office of Compliance Inspections and Examinations also said in releasing its 2016 exam priorities that examiners will continue their multi-year initiative dubbed ReTIRE, launched last June, which focuses on SEC-registered investment advisors and broker-dealers and the services they offer investors with retirement accounts.
The ReTIRE exams focus on the "reasonable basis" for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.
Fred Reish, head of the ERISA team at the law firm Drinker Biddle & Reath, added that the ReTIRE exams focus on "suitability, conflicts and disclosures for plan distributions and rollovers, as well as on management" of qualified default investment alternatives, or QDIAs.
BDs' conflicts are "front and center for a lot of reasons," Susan Axelrod, FINRA's executive vice president of regulatory operations, agreed during the interview with IA. Since releasing its priorities list in 2013, conflicts of interest — particularly as they relate to the sale of products and compensation — have been a focus for FINRA.
She noted that FINRA expects to complete this year its targeted exams launched in late 2015 of brokers' incentive structures and conflicts of interest in connection with firms' retail brokerage business.
