As the two-year anniversary of Regulation Best Interest fades, Securities and Exchange Commission officials said they expect to conduct exams to see how well the industry has adopted the 700-plus-page retail advisory rule that was designed to protect investors from costly industry conflicts of interest and hidden fees.
“Our exam staff has noted that examining for compliance with these standards is a priority, so we would expect a number of exams that are related to this to be coming up in the next year,” Thoreau Bartmann, assistant director of the SEC’s Chief Counsel’s Office, told attendees of the Practising Law Institute’s "SEC Speaks" conference yesterday.
The SEC’s focus will be on compliance with the rule overall, but also on the two staff bulletins the SEC has introduced in the past year, which he said were “critical to the effective implementation of the standards.”
“The staff expects to release at least one more bulletin on care obligations this winter,” Bartmann added.
The first staff bulletin was introduced in March and related to the standards of conduct for account recommendations, including rollover recommendations and recommendations of different account types.
“This topic was chosen because selection of an account type is a consequential decision for retail investors. It is associated with significant conflicts of interest and raises particular issues for individuals operating in dually registered or affiliated firms, as well as dually licensed financial professionals” Bartmann said.
The second guidance was issued this summer and relates to conflicts of interest, recognizing that all financial professionals have at least some conflicts of interest with with their retail customers.
This staff bulletin focuses on how firms can develop policies and procedures to address conflicts that exist in their firm and support compliance with the best interest standard.
“Our hope is that these bulletins send a strong message that we take the ‘best interest’ obligation at the heart of both standards very seriously and we expect investment professionals and firms to do the same,” Emily Russell, chief counsel of the SEC Division of Trading and Markets, said at the conference.
SEC Chairman Gary Gensler told the House Financial Services Committee shortly after being confirmed in 2020 that he thinks “it’s important that investors actually take their best interests to heart, and that’s what we’re going to do through examinations and enforcement and guidance to ensure that that rule is fully complied with as written.”
Pundits, however, worry that Reg BI may blur the distinctions between RIAs and brokers and give consumers the false impression that they are interchangeable, trusted advisors, when in fact RIAs alone have a legal fiduciary duty to put their clients’ interests first.
Russell told attendees “although the specific application of Regulation Best Interest and the investment adviser fiduciary duty may differ in some respects and be triggered at different times, in the staff’s view, they generally yield similar results in terms of the ultimate responsibilities owed to retail investors.”