Melanie Waddell

As this issue of “Investment Advisor” hits your inbox or mailbox, the compliance date for the Securities and Exchange Commission’s Regulation Best Interest and Form CRS is set to officially kick in June 30.

That is, if the U.S. Court of Appeals for the 2nd Circuit rules in favor of the SEC and upholds Reg BI in the case brought against the rule by XY Planning Network, seven states and the District of Columbia.

SEC Chairman Jay Clayton signaled that he was confident the SEC would prevail by issuing a statement in mid-June confirming the June 30 compliance date.

He warned advisors and broker-dealers that they must take special care when recommending 401(k)/IRA rollovers and withdrawals, complex or risky products as well as coronavirus-related investments and SPACs, or special purpose acquisition corporations.

The application of Reg BI to recommendations of rollovers and withdrawals from retirement accounts is one of the rule’s “most significant enhancements over the status quo,” Clayton said, and these recommendations “should be approached with care.”

Broker-dealers and advisors should be “particularly attuned” to their regulatory obligations in light of the additional flexibility Congress recently provided investors to take withdrawals from certain accounts.

The Coronavirus Aid, Relief and Economic Security (CARES) Act allows eligible participants in certain tax-advantaged retirement plans to take early distributions of up to $100,000 during this calendar year without being subject to early withdrawal penalties and with an expanded window for paying the income tax they owe on the amounts they withdraw, he explained.

“By waiving early withdrawal penalties and other limitations tied to retirement accounts, Congress provided investors with substantial flexibility to access these plans in order to weather financial hardships related to the pandemic,” Clayton said.

History of This Column and Fiduciary

As you know, The Playing Field has rightly followed the fiduciary debate as it has unfolded. It goes without saying that the ongoing “fiduciary” debate sits at the core of how advisors and broker-dealers can navigate the investment services field.

I actually started The Playing Field way back in 2002, when I was New York Bureau Chief for Investment Advisor Magazine — a position I held for two years before returning to my Washington journalism roots. Back then, there was no digital presence — only IA. My then editors sat me down and said something along the lines of: “Think up a column topic.” So I did.

The concept of The Playing Field was to not only examine how the advisory and brokerage industries were competing with one another, but to also look at how the players — in and around these industries — were shaping the rules that dictated how they could navigate.

Which players am I referring to? Well, there’s a plethora — presidents, lawmakers, SEC chairs, lobbying groups, industry officials, lawyers, cabinet agency heads (such as the Department of Labor, for instance).

Getting back to the current issue at hand, the run-up to the June 30 effective date for the SEC’s Reg BI has been culminating for years under the banner of the fiduciary duty battle. That is, getting brokers to adhere to the same fiduciary standard as investment advisors.

Many SEC chairs have taken up the mantle — during my time covering the agency: Christopher Cox, Mary Schapiro, Mary Jo White — but political differences within the agency and on Capitol Hill torpedoed efforts to issuing a “fiduciary” rule.

Needless to say that scores of lawmakers have also had their hands in the fiduciary rulemaking pie.

Clayton, however, made addressing the fiduciary issue — and eventually passing a “best-interest” rule — his top priority. He was able to wrangle a 3-1 vote to pass the four prongs of the advice-standards package — Reg BI, the Form CRS Relationship Summary, the Standard of Conduct for Investment Advisers, and a new Interpretation of “Solely Incidental.”

Former SEC Commissioner Robert Jackson, a Democrat, who left the agency on Feb. 14, dissented on all parts. The White House is expected to nominate Caroline Crenshaw, an attorney at the SEC, to fill Jackson’s seat this year.

In early June, the White House sent Hester Peirce’s nomination to be reappointed as an SEC commissioner to the Senate. Peirce, a Republican, was sworn in on Jan. 11, 2018. If confirmed by the Senate, her second term would expire on June 5, 2025.

In stating that the agency would not extend the June 30 compliance date, Clayton said the regulator believes firms with account relationships comprising “a substantial majority of retail investor assets have made considerable progress” in adjusting their business practices, supplementing and modifying their policies and procedures, and otherwise aligning their operations and preparing for compliance with Reg BI and Form CRS.

Based on the securities regulator’s engagement over the past 10 months with the industry “and because the continued implementation of these conduct and transparency initiatives, individually and collectively, will significantly benefit Main Street investors — we believe that the June 30, 2020, compliance date for Reg BI and other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate,” Clayton said.

Compliance Trip Ups

Duane Thompson, senior policy analyst at Fi360, told me in mid-June that while brokerage firms and reps “are as ready as they’re going to be” to comply with Reg BI, “it’s going to be a learning curve.”

While the SEC’s exam division is willing to work with firms unless an egregious violation is found, “there are ways you can get tripped up on” Reg BI and Form CRS compliance, namely when it comes to disclosure and conflicts, fees and expenses related to Form CRS, Thompson said.

DOL Rule to Align With Reg BI

The Labor Department sent its fiduciary rule to align with the Reg BI to the Office of Management and Budget for review on June 2.

Preston Rutledge, assistant secretary of Labor for the Employee Benefits Security Administration, who was charged with spearheading a new fiduciary rule to align with Reg BI, managed to get the rule to OMB before leaving his post at the end of May.

Fred Reish, partner at Faegre Drinker Biddle & Reath in Los Angeles, said that word on the street is that the Labor rule “is primarily a prohibited transaction exemption intended to replace the Best Interest Contract Exemption, which was vacated by the 5th Circuit Court of Appeals, and the temporary non-enforcement policy that provided relief in light of the BICE being vacated.”

Reish also has heard that “the fiduciary regulation may be modified to more clearly apply to advisors who are not covered by the SEC’s Regulation Best Interest or the RIA fiduciary standard. It’s not clear how that will be done or what other changes will be made to the ERISA fiduciary definition.”

FINRA Tweaks Rules to Align With Reg BI

The Financial Industry Regulatory Authority, meanwhile, took further steps in mid-June to align its rule with Reg BI by adding two new “problem codes” when reporting customer complaints related to Reg BI and Form CRS.

Starting on July 18, firms will be able to use Problem Code 16–Reg BI and new Problem Code 17–Form CRS, when applicable, to report customer complaint information and required documents filed under Rules 4530(f) and (g), FINRA explains in Regulatory Notice 20-17.

FINRA says that the regulator also is retiring Rule 4530 Problem Code 69–DOL Fiduciary Rule and making other non-substantive stylistic changes to the problem codes.

Firms should use Problem Code 16–Reg BI when a reportable matter involves allegations concerning possible violations of Reg BI. “This encompasses allegations that recommendations of securities or investment strategies involving securities, including recommendations of account type, made to retail customers were not in the best interest of the retail customer,” FINRA states.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@alm.com.