A massive, multi-state sweep of broker-dealers to gauge the effectiveness of their Regulation Best Interest implementation will be completed early next year, giving state regulators what they hope will be a clear snapshot of whether or not firms are putting investors interests first, Andrew Hartnett, president of the North American Securities Administrators Association, said in an interview. 

Similar multi-state exams of 443 firms last November uncovered rampant retail advice and sales violations, despite the fact that Reg BI had by that time been in place for more than 15 months.

“NASAA’s member states did not see the tide-turning reforms they had expected to see in the broker-dealer industry after Regulation Best Interest took effect,” Melanie Senter Lubin, former NASAA president and Maryland securities commissioner, said.

“Now we’re out there doing exams again to see where the industry is now, what’s changed and how well firms are implementing the requirements to look at reasonably available alternatives,” Hartnett said. 

“The current plan is for the process to finish early next year and then we’ll take a look at what we have and go from there. It’s really a matter of trying to continue to understand the efforts the industry has made to grapple with the rule, get rid of conflicts of interest and offer advice that is as conflict free as possible,” NASAA’s president said.

The time for enforcement leniency and do-overs, at least as far as state regulators are concerned, appears to be over.

“We’re beyond two years out from Reg BI implementation date at this point, approaching the two-and-a-half-year market. My instinct on this is that firms have had a enough time to get this right,” said Hartnett, who is also a top securities regulator in Iowa.

The 2021 sweep found a majority of broker-dealers and reps were still putting their own financial interests above their retail investor customers. In fact, broker-dealers increased their offerings of complex, costly and risky products by 11% after Reg BI took effect, according to NASAA.

Some 65% of brokerage firms also neglected to discuss lower-cost or lower-risk products with their customers, even when the firm offers such products, the sweep found.

On the registered investment advisor side of the business, NASAA is ramping up its focus on fees and expects to release guidance next year. 

“On the advisor said, we’re seeing all sorts of new fee models and none are bad or good, they’re just different, so we’ve worked on guidance that basically talks about whatever fee you charge, it has to be reasonable to services you provide,” Hartnett said. 

“There is nothing concerning about different fee models. The question is the same thing that it is for all fees: Is the fee appropriate for services rendered? As we see new fees come about, that for us is the question. As long as the services are rendered and the fees are appropriate, just about any fee model is great,” he added. 

Under Harnett, the organization has also taken on the Financial Industry Regulatory Authority (FINRA) over its proposal to reclassify brokers’ home offices as “remote supervisory locations,” which would enable the self regulator to do exams once every three years instead of annually. 

“Our concern is that with more people working remotely, that heightens the importance of the supervisory function and our ability to use those exams to make sure that nothing untoward is happening. We don’t want to be in the position where we don’t know what we don’t know,” he added.

“Supervisory offices should continue to be visited with the same frequency as they are currently because the importance of their work has not changed, and because firms need to understand how well supervisors are adapting to technological surveillance methods,” Hartnett said in a Nov. 25 comment letter to Finra on the proposal.

While Finra attempts to make increased use of virtual technology, there are things that technology will miss, which would be found with in-person audits, Hartnett added.