Broker-dealers are receiving deficiency letters from Securities and Exchange Commission examiners asking them to “do more” to meet the requirements of Regulation Best Interest’s care obligation, Parham Nasseri, vice president of regulatory strategy at compliance software firm InvestorCOM.
"Given the survey results, we can see that firms are most concerned with Reg BI's Care Obligation, specifically the requirements with respect to making rollover recommendations and assessing reasonably available alternatives when making product recommendations," Nasserie, a former regulator, said in an interview.
To protect investors from conflicted advice, the SEC’s Reg BI went into effect last June. For the first time, the rule requires broker-dealers and their representatives to explain how investment recommendations are in the client’s best interest and to analyze alternative investments that weren’t selected, including risk-adjusted returns, costs and advisor compensation.
It’s estimated that rollovers will hit $760 billion annually over the next five years and are already the greatest source of dollars flowing into IRAs, according to the Investment Company Institute.
But not all firms are meeting SEC expectations, according to Nasseri, who said some are reporting they are receiving Reg BI deficiency letters from the SEC regarding their handling of rollover recommendations, as well as their analysis and documentation around alternative investments.
Nearly 75% of firms report they expect the most significant Reg BI enforcement around their handling of rollover recommendations and alternative investment analysis, according to a survey of more than 100 firms taken Friday by InvestorCOM.
Adding to the pressure firms feel is the U.S. Department of Labor’s more onerous rollover and retirement investment advice regulations, which went live last February and will be enforced for the first time starting next month,
Nasseri called the confluence of the two regulations on firms and their compliance departments "a perfect storm."
Failure to standardize, digitize and supervise the care obligation requirements are the top compliance red flags, Nasseri said. Some firms are even allowing reps to “self attest” and check a box saying they have offered rollover recommendations that are in clients’ best interests.
“I can tell you just logically that self-attestation can be risky. Some firms will take this risk because of various circumstances, but I think this might come to a head through regulatory exams,” Nasseri said.