Retail advice and sales violations that cost investors millions or even billions of dollars a year are still rampant, despite the fact that new rules to curb abuses have been in place for more than 15 months, North American Securities Administrators Association (NASAA) officials reported today.
The finding is based on state regulatory exams of 443 firms across the country, which found that a majority of broker-dealers and reps are still putting their own financial interests above retail investors despite the implementation of Regulation Best Interest in June 2020, which prohibits firms from doing that.
In fact, regulators found that broker-dealers increased their offerings of complex, costly and risky products by 11% after Reg BI took effect, according to a new Nasaa report.
Also, 65% of brokerage firms “are not discussing lower-cost or lower-risk products with their customers when they recommend these products,” even when the firm offers such products, the organization said.
“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,” said Melanie Senter Lubin, NASAA president and Maryland securities commissioner.
“This examination reveals that while there were some improvements, most firms are operating in the same manner as they were under the suitability rule, especially when it comes to harmful compensation conflicts,” she added. “We hoped to see firms close the gap between suitability and fiduciary advice and we did not see that.”
Compensation conflicts were concentrated in firms that recommended complex, costly and risky products such as variable annuities, private securities offerings, REITs and leveraged or inverse ETFs after Reg BI took effect, according to NASAA. But not all firms offered such products or had such conflicts, which dismantles the narrative that costly conflicts are inherent in the brokerage model, Senter Lubin said.
“There’s a right place, time and investor for these kinds of products, but the investor complaint data and state enforcement data shows that firms are not offering them to the right investors. Firms need to ramp up compliance to make sure these products are being matched with the right investor. There needs to be better matching and disclosure than we are seeing under Reg BI,” she said.
These were among the other NASAA findings:
• Some 24% to 30% of broker-dealer firms surveyed were still using sales contests, differential compensation and extra forms of compensation. These compensation conflicts are rarely seen in fiduciary firms and were observed in only 0.55 to 3% of investment advisors examined in a phase I study Nasaa conducted, according to NASAA.
• Some 40% of broker-dealer firms surveyed that recommended leveraged or inverse exchange-traded funds had compensation conflicts, as did 41% of firms that recommended private securities, 44% of firms that recommended variable annuities, and 52% of firms that recommended non-traded real estate investment trusts.