Pedestrians walk near the U.S. Securities and Exchange Commission headquarters in Washington, D.C., U.S., on Thursday, Jan. 2, 2020. The federal appeals court in Manhattan today said the government may pursue insider-trading charges under a newer securities-fraud law not subject to a key requirement of the statute prosecutors traditionally use. Photographer: Andrew Harrer/Bloomberg
© Bloomberg

Broker-dealers have until June 30 to comply with the US Securities and Exchange Commission’s Regulation Best Interest rule and the sector is still working towards that goal despite obstacles to hitting the deadline.

The new rule — commonly referred to as Reg BI — requires brokers to act in the best interest of their retail clients when recommending a securities transaction or investment strategy involving securities and be clearer on any commissions paid.

The coronavirus pandemic and pending lawsuits seeking to block the new rule are among the stumbling blocks to compliance. But broker-dealers knew about the deadline as far back as June 2019, when the rule was approved by the SEC.

In a survey conducted late last year, most of the firms then believed they would meet the compliance deadline.

The target date still holds. Earlier this month, Jay Clayton, SEC chairman, said the June 30 deadline remained “appropriate” based on the regulator’s engagement with companies affected by the new rule over the past 10 months. Mr Clayton added that companies that cannot meet requirements because of the disruptions caused by coronavirus should discuss their situation with the SEC.

WASHINGTON, DC - MARCH 23: Jay Claton testifies before the Senate Banking Committee during his confirmation hearing to be chairman of the Securities and Exchange Commission in the Dirksen Senate Office Building on Capitol Hill March 23, 2017 in Washington, DC. Nominated by U.S. President Donald Trump to lead the SEC, Clayton was questioned by senators about his years representing large banks like Goldman Sachs, Barclays, Deutsche Bank and other Wall Street companies. (Photo by Chip Somodevilla/Getty Images)
Jay Clayton, SEC chairman © Getty

Todd Moll, chief investment officer at Florida-based Provenance Wealth Advisors, says the coronavirus pandemic has not hit his preparations for Reg BI so far. “Many of the company’s staff have the ability to work completely remotely and we have established a firm-wide remote work policy since March 13,” he says.

According to the survey, conducted by Deloitte & Touche, most respondents considered the delivery of the Customer Relationship Summary disclosure form the most challenging part of the new rule. This “Form CRS” is aimed at clearly stating to clients whether they are dealing with a broker-dealer or an investment adviser. It requires an explanation of the principal types of services offered; the legal standards of conduct that apply to the investment adviser or the broker-dealer (whichever relationship applies); the fees a client might pay; and certain conflicts of interest that may exist.

Provenance Wealth Advisors is working with compliance consultancy Foreside to create its disclosure form. “We have had compliance training sessions with our staff that will continue up until June 30,” Mr Moll says. Its “Form CRS” will be available by electronic and paper delivery.

Matthew Radgowski, head of adviser solutions at Morningstar, expects Reg BI to change the way broker-dealers recommend investments. “They will need to become systematic, and firm-wide processes must be followed with every investment recommendation,” he says. “The whole process that the broker-dealer’s representative goes through will be documented so it can be called upon, whether for internal supervision or for outside examination.”

Consumer advocates still have little faith in Reg BI’s ability to protect investors, however. Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC’s Investor Advisory Council, says none of the most important provisions in the rule is defined. “We don’t know what it will mean to make recommendations in the best interest of the customer or whether that will differ in any significant way from what is already required under [Financial Industry Regulatory Authority]’s suitability standard,” she says. The suitability standard imposed by Finra, the self-regulatory body that governs US broker-dealers, only requires a broker to ensure a recommendation is suitable to an investor.

Much of the compliance to Reg BI relies on disclosure but investors typically do not read through disclosure documents, says Ms Roper. Even when they do, they do not necessarily understand them.

“The problem . . . reminds me of when my husband and I were in Germany and I knew just enough German to ask for directions but not enough German to understand the answers we got. I think you can tell investors to ask advisers questions, but the advisers can be adept at giving them the runaround,” Ms Roper says.

Barbara Roper
Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC’s Investor Advisory Council

Instead of relying on Reg BI, investors should try to identify advisers who are willing to embrace a higher standard, argues Ms Roper. “They should seek out those firms that adopt a business model that really seeks to reduce conflicts of interest.”

Mr Moll acknowledges that pending lawsuits against the SEC and Reg BI — if the plaintiffs succeed in blocking the new rule — could hit the preparations already done by his firm.

One lawsuit filed last September argues that the SEC overstepped its authority by deviating from what was prescribed by the 2010 Dodd-Frank Act. The suit was filed by the attorneys-general of seven states — New York, California, Connecticut, Delaware, Maine, New Mexico and Oregon — and the District of Columbia.

The SEC also faces another lawsuit, also filed last September, by XY Planning Network on behalf of rival registered investment advisers. It states that Reg BI would create an unfair advantage for broker-dealers over competing RIAs who, it argues, remain subject to tougher fiduciary standards.

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