The SEC’s Regulation Best Interest went into effect in July 2020. The DOL’s fiduciary rule and permitted transaction exemption (PTE), which allows advisors and brokers to accept conflicted compensation, went live in February, but the agency has twice delayed enforcement, most recently postponing it for some portions of the rule until June.
“I do not see the DOL delaying enforcement again,” Szapiro said.
Some conflicted compensation practices at broker-dealers, such as revenue-sharing arrangements, are likely to raise red flags with both the DOL and SEC, he predicted.
“Right now, all we can ascertain when we look at firms’ disclosures is that some fund companies are paying revenue sharing to broker-dealers for the sale of their products,” Szapiro said, noting that the dearth of details are a problem if you want to measure how such revenues influence the choice to sell one product over another.
For dual registrants who recommend such funds in advisory accounts, “the revenue share is paid on a straight asset-under-management basis, but every extra dollar beyond what an advisor is paid is pure revenue for the broker-dealer,” Szapiro said.
Individual conflicts like those created by compensation grids are much easier to police. Firm-level conflicts created by profit motive may prompt the firms to create software that generates recommendations for such funds, which is an issue that the SEC and DOL will have to zero in on, Szapiro said.
Right now, revenue-sharing arrangements are “a conflict that is underexplored by regulators,” he added.