The challenging environment for wealth advisors and investors didn’t stop the Securities and Exchange Commission (SEC) from implementing the first steps toward Regulation Best Interest (Reg BI) this summer. SEC Chairman Jay Clayton explained why: Firms, he said, should apply an approach to resources that puts safety first, while adopting the SEC’s message that “the (Reg BI) law continues to apply.”
Meanwhile, the Financial Industry Regulatory Authority, Inc. (Finra) has weighed in with a tweak of its own. The regulatory body wants broker-dealers and wealth managers to craft policies that prohibit non-cash compensation awards on the basis of “sales of specific securities or specific types of securities occurring over a limited time period.”
Finra’s stated goal for the proposed change is to clarify and align its non-cash compensation rules with Reg BI’s Conflict of Interest Obligation. Overall, the Finra proposal seems intended to add clarity with respect to Reg BI’s effect on certain Finra rules while fixing inconsistencies with Reg BI. Under the conflicts of interest obligation of Reg BI, broker-dealers and wealth managers must establish, maintain and enforce written policies and procedures reasonably designed to identify and eliminate potential non-cash compensation conflicts.
Putting Non-Cash Compensation Where It belongs—On The Books
The proposed move got the attention of compliance officers and decision makers at leading firms who have told us that the tracking and reporting of this compensation category has been difficult. “Too many non-cash compensation events still go unreported,” one compliance officer told us. Another firm said, “I’m worried that up to 80% of our firm’s total dollar amount may still be off the books.”
A look at the tracking routine of an average broker-dealer or wealth manager during normal times, not to mention during today’s troubled climate, can help explain why so much non-cash compensation can go missing so easily.
Guesswork. A financial advisor might have qualified for and participated in an asset manager-sponsored education event for Continuing Education credits. Any estimate of value of the advisor’s part might not align with the true dollar amount the asset manager recovered from its fund shareholders.
Missing Data. A broker-dealer or wealth manager might aggregate all given costs from their advisors, but miss a few of the events because of delayed or omitted reporting.
Inaccuracy. The sum total of guesswork and missing data is inaccuracy. When asset managers receive and send broker-dealer expense reports to their operations group for reconciling and data cleansing, inaccuracies may surface from these misaligned documents.
To Fix A Breach
The result of a non-cash compensation event being unrecorded or reported inaccurately is the same: a compliance breach. When you add the client service pressures on advisors and firms during our historic, challenging period, it may be no surprise that every minute spent reconciling a tangle of events between advisors and asset managers is a minute subtracted from their capability for client service.
With Finra’s focus on non-cash compensation and the SEC’s avowed drive to put the client’s Best Interest ahead of any volatile developments in the market, firms are confronted with three choices for “fixing what’s broken” in their tracking and reconciliation efforts.