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Regulation and Compliance > State Regulation

What's Next in Reg BI Compliance?

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Welcome back to Human Capital. While compliance efforts by the industry and the regulators are in full swing, the democrats’ presumptive presidential nominee, Joe Biden, is threatening Reg BI’s future.

He vowed in his recent party platform plan to “take immediate action to reverse the Trump Administration’s regulations allowing financial advisors to prioritize their self-interest over their clients’ financial well being” — an apparent reference to Reg BI and the Labor Department’s fiduciary prohibited transaction exemption intended to align with it. (The comment period on Labor’s PTE expires on Aug. 6.)

Valerie Mirko, a partner in Baker McKenzie’s Financial Regulation and Enforcement Practice Group in Washington, tells Human Capital that while Reg BI enforcement won’t kick in this year, advisors can expect exams from the SEC and FINRA as well as another set of frequently asked questions guidance from the SEC before year-end.

Mirko doesn’t expect Reg BI enforcement “to happen very quickly” — not this year — but after the SEC’s Office of Compliance Inspections and Examinations and FINRA’s exam program conduct a “very thorough policies and procedures set of exams on a remote basis, look at those findings, see where the industry is in terms of practices” they’ll “adapt FAQs.”

While FINRA statements regarding Reg BI compliance “have tracked very closely” to the SEC’s, “I would expect the FAQs from the SEC,” Mirko says. Reg BI is “a complicated rule with a lot of parts. … Now is the time to see where there needs to be more clarity.”

Reg BI is a principles based rule with critics arguing the rule is not defined. Reg BI was written for broker-dealers that have had a “more prescriptive regime in terms of rules that they comply with,” Mirko says. However, “keeping [Reg BI] as a principles-based regime is important because it’s meant for different business models.”

As to Labor’s PTE to align with Reg BI, “I think the proposal is an improvement over the last two iterations” Labor issued. “Remember, the last time Labor put out a proposal there was no Reg BI construct in place.” Labor’s new PTE “takes into account a best-interest standard, takes into account Reg BI compliance or Investment Adviser Act fiduciary duty compliance to fulfill the DOL best-interest obligation.”

Firms will need to “add on” to their compliance programs should the proposed exemption become effective, Mirko says.

The rule “has a strong disclosure component,” which was not part of the last two fiduciary rules and “is generally not the case with the regime. I think right there this proposal is making a concerted and thoughtful effort, while it is an ERISA proposal, to align with the securities framework.”

That said, “it still will be a lift for firms to comply with an additional regulation.”

Massachusetts’ Fiduciary Rule

Of course, Massachusetts’ fiduciary rule has a Sept. 1 enforcement date — creating another fiduciary compliance layer. “One of the key questions under the Massachusetts rule is whether the fiduciary standard is episodic, meaning that it only applies at the time of the recommendation or whether there is an ongoing duty that extends beyond the time of the recommendation,” Mirko explains.

The DOL plan, meanwhile, “raises the question of whether a firm can be a fiduciary under ERISA and the tax code but still provide episodic advice under the Massachusetts fiduciary rule,” Mirko points out.

“All eyes are on what happens” as the Massachusetts rule takes effect, she said. “I would expect other states to look toward how Massachusetts implementation and enforcement plays out.”

The state next in line to potentially approve a rule is New Jersey, but that rulemaking is paused due to COVID-19.

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