On March 30, 2022, the SEC issued “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors” (SEC Retail Standards Bulletin). This guidance builds on prior SEC guidance regarding Regulation Best Interest (Reg BI) and the SEC’s “Main Street” initiatives impacting investment advisory firms since the SEC’s self-reporting “Share Class Selection Disclosure Initiative” announced just over four years ago. In the intervening years, the SEC issued a FAQ “Regarding Disclosure of Certain Financial Conflicts of Interest Related to Investment Adviser Compensation” and issued the Reg BI rulemaking package that included the “Commission Interpretation Regarding Standard of Conduct for Investment Advisers.” This blog has covered all of these developments and, regarding the once separate standards of conduct for brokerage and investment advisory firms, described the developing convergence of these standards as they apply to retail investors.
Posts by :
Pennsylvania has adopted legislation implementing the model regulation concerning suitability in annuity transactions adopted by the National Association of Insurance Commissioners (NAIC). This brings to 19 the total number of states adopting the NAIC suitability model. Nevada may be the next state to watch. Nevada’s Securities Administrator has indicated that she is resuming work on the state’s fiduciary rule for investment advisers and broker-dealers and expects to release the rule by November. Stay tuned.
It may be a New Year, but 2022 is going to seem very familiar to Broker-Dealers (BD) and their Registered Representatives who advise retirement plans and IRAs: they are going to be spending a lot of time working to comply with new exemptions and new ERISA rules coming from the Department of Labor (DOL). As some of these deadlines are right around the corner, in this post we’re going to review the five most common pitfalls and problems we’ve seen clients face, and how to better address them in disclosures and policies and procedures.
So what’s ahead this year regarding fiduciary advice and exemptions? First, DOL is working on a new proposed definition of ERISA fiduciary investment advice to replace the 1975 regulation, and could publish the new proposal for comments this spring. This proposal may also include changes to DOL’s new Prohibited Transaction Exemption 2020-02 (the PTE). If DOL succeeds in rewriting these rules, they likely will go into effect in 2023. That means the current rule and the current version of the PTE will likely remain in effect for the next 12-18 months.
SEC Chair Gary Gensler has not publicly stated much regarding Reg BI since Spring of this year. Generally, though, the messaging from SEC leadership regarding the Division of Examinations and the Division of Enforcement continues to be aggressive. In the retail investor area, for example, in late August Chair Gensler appointed Barbara Roper, the Director of Investor Protection for the Consumer Federation of America, as a Senior Advisor to the Chair. Turning back to Reg BI specifically, what we continue to hear out of the SEC is that Chair Gensler’s regime is going to play the Reg BI “hand that it has been dealt” aggressively.
On November 4, 2021, SEC Commissioner and former Acting Chair Allison Herren Lee gave a speech at ACLI’s CLE 2021 Conference on Life Insurance Products entitled “A Call to Action: Recommendations for Complying with Reg BI.” Commissioner Herren Lee covered several Reg BI topics, including what constitutes a recommendation and mitigation. Regarding recommendations, she noted that the Commission’s supplemental materials accompanying Reg BI speak of a “call to action” that may be viewed as influencing an investor to invest in or trade a particular security being enough to constitute a recommendation. On this topic, she emphasized the importance of the account opening process. Commissioner Herren Lee also addressed mitigation, in particular to manage the risk of an associated person putting their interests ahead of their customers, perhaps due to limitations in the firm’s products menu.
Welcome to the Broker-Dealer Regulation & Litigation Digest – a periodic compilation of the most popular blog posts from the Broker-Dealer Law Blog during the last few months. If you don’t already receive our posts, you can subscribe to the blog.
Reg BI has passed its compliance date of June 30, 2020. The SEC and FINRA have commenced examinations to test brokerage firms’ good faith compliance with Reg BI and Form CRS disclosure satisfaction. Our article “Have No Fear, Reg BI Is Finally Here” provides a brief overview of Reg BI and deciphers its implications for brokers and broker-dealers. It also provides an overview of a recent Risk Alert drafted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), and examines the SEC’s and FINRA’s review of Reg BI compliance.
The SEC’s standard of conduct for broker-dealers under Regulation Best Interest (Reg BI) became effective on June 30, 2020. While registered investment advisers (RIAs) always have been subject to a best interest standard of conduct (i.e., the overarching standard that encompasses both the duty of care and the duty of loyalty), the SEC’s clarification of that standard in its Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation) has been in effect since July 12, 2019. There are similarities in these two standards, but there are significant differences as well. Here is how the two standards compare:
The SEC recently announced its first round of settlements with registered investment advisors (RIAs) who had self-reported pursuant to the agency’s Share Class Selection Disclosure Initiative (SCSD Initiative). Additional RIA settlements pursuant to the SCSD Initiative are expected, and RIAs who did not self-report face additional scrutiny from the Division of Enforcement. Industry reaction has involved frustration, but the SEC’s focus on RIA conflicts of interest, disclosures, and more recently revenue sharing is increasing. Jim Lundy and Mary Hansen discuss these developments in this article, SEC Releases SCSD Self-Reporting Initiative Settlements.
Last month the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued its “2019 Examination Priorities.” The release of OCIE’s 2019 Priorities this year was earlier than in years past. In retrospect, the date of issuance being the last day before the vast majority of the SEC staff was furloughed may just be coincidental, but the federal government shutdown allowed the industry more time to study OCIE’s 2019 Priorities for compliance planning for the upcoming year. Another impact of the shutdown and furloughs in an area directly related to OCIE’s first priority is that the SEC’s efforts and the timing of the finalization of the Reg BI proposals have very likely been slowed as well. The recent ending of the SEC furloughs and OCIE’s continuing prioritization of retail and retirement regulatory issues presents us with an opportune time to re-visit these important topics.
In a previous post, we discussed why broker-dealers and their representatives will likely still be fiduciaries to ERISA plans and IRA investors in many cases despite the DOL Fiduciary Rule’s impending death (we say “impending” because, while the Fifth Circuit’s ruling in mid-March vacates the Fiduciary Rule in its entirety, the court’s official order implementing this decision has yet to be issued). To review, this is because broker-dealers and their representatives often satisfy all the prongs of the soon-to-be reinstated 1975 fiduciary regulation’s “Five-Part Test” defining when investment recommendations rise to the level of “fiduciary” advice. Previous industry assumptions that brokers and other “sellers” of investments generally were not fiduciaries under the 1975 regulation should no longer be relied upon. In this post, we’ll examine how the Fiduciary Rule’s impending demise will affect prohibited transaction and compensation issues for broker-dealers in light of their likely continuing status as fiduciaries. Continue reading “Why Fiduciary Status Still Matters in a Post-Fiduciary Rule World: A Look at Prohibited Transactions And Compensation”