State securities regulators are surveying broker-dealers registered in their states, asking the firms to answer detailed questions about their Regulation Best Interest compliance.
A similar survey last year triggered state regulators to conduct sweep exams of broker-dealers. Those exams found that broker-dealers were two to eight times more likely than registered investment advisors to recommend risky investments. The exams benchmarked the practices of more than 2,000 firms and 360,000 practitioners working with 68 million retail investor accounts.
Analysis of firms’ answers this year will again help regulators determine what sweep exams and policies to pursue, Kentucky Securities Administrator Marni Rock Gibson said in an interview.
“We are really just in the information gathering stage right now, but will follow up with more information and sweeps as we determine what firms are doing,” Gibson said.
“I think generally broker-dealers are really taking a look at guidelines issued by the [Securities and Exchange Commission], trying to amend their policies and procedures accordingly,” she added. “As far as anecdotally, I don’t have a lot and I really can’t share anything about our findings yet. Generally, the goal is to see that broker-dealers are looking at all the guidance.”
The state exams in 2020 found eye-opening differences between the way broker-dealers and RIAs were operating earlier this year. That was prior to the implementation of Reg BI, which was implemented on June 30 to reduce aggressive, conflicted and unnecessarily costly investment advice that harms investors.
Broker-dealers were twice as likely as investment advisors to recommend the purchase of leveraged and inverse ETFs, seven times more likely to recommend private placements, eight times more likely to recommend variable annuities, and nine times as likely to recommend non-traded REITs, the North American Securities Administrators Association said in its exam report.
Once again, survey questions concentrated on broker-dealers’ handling of four products—leveraged and inverse ETFs, private placements, variable annuities and non-traded REITs--to see how firms are handling their best interest obligations under the new requirements of Reg BI.
“Our first survey last year was done to create a baseline,” Gibson said. “This survey allows us to see how companies’ policies, procedures and practices have changed since June of last year.”
The deadline for broker-dealers to return the survey was the end of July. “We have all the data now. As you can imagine it takes some time to analyze all the information. We hope to have that done sometime this fall,” Gibson added.
Last year’s sweep exams and survey found that RIAs generally took a more conservative investment approach overall, “avoiding higher cost, riskier, and complex products. Investment advisers also reported more robust due diligence, disclosure, and conflict management practices,” NASAA said.
Last year’s exams went forward despite pressure from industry trade groups to suspend the sweep, NASAA said. The Financial Services Institute, Securities Industry and Financial Markets Association, Insured Retirement Institute and U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness were among a consortium of trade groups that sent a letter to state regulators objecting to various aspects of the examination, as well as the timeline. They asked that states suspend the examination initiative in its entirety.
NASAA proceeded with the sweeps anyway, although a few states agreed to short extensions on a case-by-case basis, state regulators said.