The cases “reinforce the importance of meeting regulatory obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals,” said Gurbir S. Grewal, the director of the SEC’s Enforcement Division, in a statement.
Getting Tough With Reg BI
The SEC’s more aggressive work recently on Reg BI enforcement is not expected to be an isolated event. “You can really see this in the SEC risk alert on wrap fee programs really focusing on examining whether firms are making decisions about wrap fee accounts that are in clients’ best interest and whether they’re really monitoring the trading in those accounts,” Barr says. “To me that’s an example of what the SEC will do around Reg BI. They are really examining closely to see that RIAs and broker-dealers are backing up their actions through compliance and disclosure.”
Aron Szapiro, head of policy research at Morningstar, says he expects the SEC to use “regulation by enforcement” and zero in on how advisors and broker-dealers choose reasonably available investment alternatives. Szapiro also thinks the way firms choose to reduce their conflicts of interest and disclose remaining conflicts will top the agency’s Reg BI compliance and enforcement priorities.
“There are such a wide variety of approaches firms are taking with this principles-based regulation,” he says. “I think you’ll see some SEC enforcement and some regulatory guidance to mitigate” outliers and noncompliance.
According to Robin Traxler, the senior vice president of policy and the deputy general counsel of the Financial Services Institute: “We’re hearing from our members that the implementation of Reg BI has gone well. We’ve also heard that members are having really helpful conversations with the SEC and [the Financial Industry Regulatory Authority] exam staff, specifically when the staff expresses concerns or has questions about the way a person implemented Reg BI.”
However, Traxler adds, “If the SEC interpretations of Reg BI evolve over time as they go through their examination process, we would expect them to provide appropriate guidance or exam findings reports to the industry as opposed to widespread enforcement actions. So far, we’re encouraged by what we’ve seen in the common exam findings that the SEC has issued. But we will continue to monitor developments in examinations.”
As for the slew of Form CRS settlements, Traxler says, “It was not a surprise. Form CRS has very clear requirements, and the firms just didn’t file. So I think that is us seeing the SEC at work and ensuring that Reg BI is being implemented properly and reaching its intended goals.”
One of the greatest dislikes of an advisory firm is duplicative regulatory exams, where Finra and SEC examiners show up at the same time or back to back and fail to coordinate their work. That has been a particular concern with regard to exams of firms’ implementation of Reg BI. After all, it was a recurrent issue during the Obama and Trump administrations. But Traxler said she hasn’t heard any firms complain about it so far.
Under SEC oversight, Finra is also cracking down on rogue brokers by forcing the firms that hire them to set aside financial reserves to pay arbitration awards they have been known to escape by closing up shop and reopening under new names. The new rule was approved by the SEC in early August.
The crackdown on recidivist brokers is not an issue for FSI members, Traxler says. “We’ve historically taken the position that advisors who do bad things and have violated rules should not be allowed in the industry.”