With four months remaining until enforcement with the Securities and Exchange Commission’s Regulation Best Interest kicks in, broker-dealers and advisors are wondering if they “need to race to comply” with Reg BI, particularly if the rule is going to suffer the same fate 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, advisors and BDs “don’t have much choice” but to comply with Reg BI’s June 30 compliance date, Aikin said during a recent Fi360 webinar.
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.”
Robert Levine, compliance practice leader of Bates Group LLC, stated in an interview with me in early February that “100% firms need to be ready to go live” on the June 30 compliance date.
Reg BI, he maintained, is “going to be here to stay.”
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, stated 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.”
In fact, BDs have “a relatively short runway” to get into compliance and operationalize Reg BI, Levine added.
That being said, the Financial Industry Regulatory Authority, the enforcer of Reg BI, along with the SEC “have done very well in saying there won’t be a lot of ‘gotcha’ exams in the first year unless you’ve just done nothing,” Levine said.
While Levine sees “some additional runaway on the back end of June 30 that will allow some firms to tweak their [compliance] programs, … once June 30 comes around they can’t just sit back and say: ‘we’re done implementing this’ — it’s going to have to be constant review and tuning of the program to get it right.”
The SEC will expect “good-faith attempts” to comply with all four parts of Reg BI — care, disclosures, conflicts of interest and compliance, said Sandra Dawn Grannum, partner in Faegre Drinker’s Litigation Group, during the law firm’s early February Inside the Beltway webcast.
In other words: BDs must show they’ve taken measures to ensure actions are in the best interest of clients (care), disclosed situations where a conflict may arise, and “possibly even” mitigated conflicts. If a BD doesn’t “have written supervisory procedures (compliance) in place to ensure your measures are being carried out, … you have failed to comply with Reg BI,” Grannum said.
Pete Driscoll, director of the SEC’s Office of Compliance Inspections and Examinations, said that in January, as part of the agency’s regular BD exams, the agency began questioning firms about their implementation programs and fielded questions about Reg BI.
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.
New Form CRS Woes
Form CRS, part of the agency’s four-pronged advice-standards package along with Reg BI, requires BDs and investment advisors to provide the form to retail investors.
The form must include information on fees and costs, compensation structures, relationship models, types of services offered, differences between advisors and broker-dealers and conflicts of interest.
But at least one of Levine’s dual registrant clients has voiced concerns that Form CRS “may confuse [retail clients] and not clear up the difference between what a broker and investment advisor is, specifically the fees” the client is going to pay.
Unlike other firms, dual registrants can present a four-page Form CRS to clients — instead of two pages. Dual registrants can either give clients one four-page document or two, two-page documents, Levine said.