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Regulation and Compliance > State Regulation

Don't Sleep on Reg BI Compliance, Industry Officials Warn

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Industry officials are warning advisors and broker-dealers not to dawdle on compliance with the Securities and Exchange Commission’s Regulation Best Interest and advice-standards package, with one compliance firm stating that the consequences for noncompliance are “heavy.”

Top of mind for advisors and broker-dealers is whether they “need to race to comply” with Reg BI if the rule is going to suffer the same fact as the now-defunct Labor Department fiduciary rule, according to Blaine Aikin, executive chairman at Fi360, a fiduciary education, training and technology company.

Despite legal challenges, however, advisors and broker-dealers “don’t have much choice” but to comply with Reg BI’s June 30 compliance date, Aikin said during a recent Fi360 webinar.

Aikin, along with Duane Thompson, Fi360’s senior policy analyst, agreed that as with the vacated Labor rule, “you have to assume the deadline will take effect when the agency said it would.”

Further reason to press ahead: The direction of fiduciary advice “is certainly one that’s going to be maintained; we can see that there is increased emphasis towards fiduciary principles,” Aikin added.

Like its Labor fiduciary rule predecessor, Reg BI is undergoing challenges in the courts and “most immediately from state initiatives that purport to offer state residents greater protection than Reg BI,” the Bates Group, a regulatory compliance and litigation consulting firm, writes in a recent paper. “Despite these challenges, the obligations Reg BI imposes on financial firms are real and immediate. They require considerable preparation, and the consequences for failure to comply are heavy.”

Whether the Reg BI “survives in the long run remains an open question; current compliance with it is not,” Bates warns.

Indeed, Thompson stated that the SEC’s exam priorities for 2020 show a heightened focus by the agency on the advice-standards package.

Pete Driscoll, director of the SEC’s Office of Compliance Inspections and Examinations, said that in January, as part of the agency’s regular broker-dealer exams, “We’ll start having a series of questions to talk with firms about: How’s implementation going? What questions do you have?”

After the advice-standards package compliance dates, OCIE plans to assess firms’ implementation of Reg BI requirements as well as the content and delivery of the Customer Relationship Summary, or Form CRS.

Reg BI Fiduciary Principles ‘No Small Thing’

Besides a heightened fiduciary exam focus from the SEC, “Reg BI does very, very significantly introduce fiduciary principles into the existing suitability standard for broker-dealers, and that’s no small thing,” Aikin said. “So it does raise the bar, albeit not to a true fiduciary level.”

Indeed, attorneys at Groom Law Group in Washington argue in a recent brief that the SEC’s recent FAQs on Reg BI indicate that the rule “may raise the standard of care and compliance obligations for financial institutions more than some consumer groups had expected.”

In some ways, the attorneys write, the FAQs further clarify “the overlap” between Reg BI and the 2016 Labor rule.

For example, “the scope of the definition of ‘recommendation’ in each is meant to exclude actions that might stifle investment education or retirement savings,” the attorneys write.

However, the FAQs also point out areas “where disharmony could be perceived and accommodations may be necessary” from the Labor Department in its soon to be released fiduciary rule reboot, “such as in the area of representative compensation structures.”

The Groom attorneys are hopeful that the period of trying to read tea leaves about release of Labor’s upcoming fiduciary rule to align with Reg BI “will soon end.”

Labor, the attorneys state, “was tasked with reviewing its 2016 rule almost three years ago” through a Feb. 3, 2017, presidential memorandum “and we are optimistic that the DOL’s response will be released soon.”

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