While most broker-dealers are making a “good faith effort” to comply with Regulation Best Interest, some firms are not properly implementing the massive new retail investment advice rules designed to ensure that registered reps don’t place their own interests above customers, Securities and Exchange Commission and Finra officials said during an SEC roundtable today.
SEC and Finra officials said they are finding deficits in firms' implementation of Reg BI, including instances where firms grafted the new retail investment advice rules onto existing suitability standards, didn’t build out systems omissions in compensation, conflict of interest and disciplinary histories and instances where firms are not spelling out procedures registered representatives are expected to follow. The roundtable marked regulators’ first assessment of industry implementation since rule went live on June 30.
“Sometimes we see policies and procedures that restate the standards and don’t really provide registered reps with the additional guidance they need to ensure compliance,” John Polise, an associate director of the SEC’s Office of Compliance, Inspections and Examinations, said at the roundtable. Other firms “may tell the registered rep to consider reasonably available alternatives as required by the rule, but may not identify what costs to take into consideration or how to identify reasonably available alternatives” when evaluating if the products are in the best interest of the investor,” Polise said.
Whether firms are using internal systems or third party processes, “you just have to be careful and make sure they are appropriate for your firm and your business model and [understand] they may not be sufficient in and of themselves to ensure compliance,” he added.
Other firms appear to be grafting Reg BI regulations onto their existing suitability policies and processes without taking into consideration important differences, such as the broad new conflict management requirement, said Lourdes Gonzalez, assistant chief counsel for sales practices for the SEC's Division of Trading and Markets.
“Is your existing system adequate to identify conflicts under Reg BI, to mitigate those conflicts and in some cases to eliminate the conflicts? You also need to go through the same assessment for disclosure and care components of Reg BI,” Gonzalez said.
While the rule builds on existing regulation, it casts a wider net in key respects, including covering a broader set of investors than suitability rules, including some former institutional investors who are considered retail investors under Reg BI. “We’ve seen a little bit of confusion on that,” Gonzalez said.
Firm's “policies and procedures need to capture new obligations, including costs as a consideration when making securities recommendations. It also expanded the scope to rollovers and account type recommendations that didn’t use to be considered under suitability,” she said.
According to Bill St. Louis, Finra senior vice president of member supervision, many exams of broker-dealers “are still in flight.” But Finra examiners are “seeing a failure of firms to appropriately distinguish between suitability and Reg BI obligations. Many firms seem to have layed reg bi onto suitability without attention to harmonizing the two,” he said.
Other concerns St. Louis addressed: “Some firms have compliance obligation procedures that have been developed, but have not been memorialized or not memorialized adequately. Some firms’ procedures lack detail as to who, when and how, for example, responsible individuals are not identified. Some also lack controls around testing and have no plans for testing of the procedures and no plans around the testing of record keeping requirements,” he said.