Stop “Searching for Some Ambiguity” in Reg BI Compliance, SEC Chief Says
The new Securities and Exchange Commission Chair Gary Gensler left little room for doubt about his intention to start aggressively enforcing the agency’s nearly one-year-old Regulation Best Interest rule.
The remarks represent an ongoing shift in priorities under Gensler, who took over from predecessor Jay Clayton in April and is expected to take a more vigorous enforcement stance.
The SEC’s examination division in December warned firms to shift focus from the ‘good faith’ implementation efforts it encouraged when the rule took effect on June 30, and said that it will focus this year on the rule’s requirement that firms “go beyond suitability standards and require broker-dealers to have a reasonable basis” for recommendations.
Any grace period for Reg BI implementation has ended, according to Gensler’s remarks, as well as those of other regulators and large- and small-firm compliance experts who spoke during an earlier Finra conference panel discussion.
“We’re beyond the ‘How do you get through year one?’ We’re now focused on ‘How well did you do at ramping up?’ and ‘Where are your gaps?’ and ‘How do we think about enforcement?’” said Hillary A. Sale, a Georgetown University Law Center associate dean and professor.
Firms have to be ready to “lay their cards on the table” for examiners now that the ‘good faith efforts’ period is over, said Evan Charkes, a managing director and associate general counsel for Bank of America, who supports the Merrill Lynch Wealth Management business.
“Now we’re in the examination phase,” he said during the same panel. “This is when you’re going to lay your cards on the table and see what the SEC or FINRA are going to say back to you.”
Charkes and other firm compliance officials said they were making sure they had evaluated potential conflicts on the advisor and firm level, including, for example, implementing levelized payments to advisors across mutual funds, share classes, annuities and other commission products. Documentation would also be key, panelists said.
Staying in compliance also requires ongoing monitoring, said Ilene Marquardt, assistant general counsel for Wells Fargo Advisors, who spoke on the same panel.
“We take a look at new products, and even changes in compensation schedules, or anything that comes up that has the potential for raising an issue under Reg BI,” Marquardt said. “The conflicts inventory should really be a living dynamic document that you’re constantly studying in order to comply with rules.”
“Even if you’re making decisions not to offer something, that may trigger Reg BI disclosure obligation,” she said.
Gensler earlier this month told lawmakers he plans to enforce the rule “as written,” a sign that he would not be overturning or rewriting the rule despite some hopes from investor advocates who said it did not go far enough to actually eliminate conflicts.
Gensler on Thursday stressed Reg BI is not just about disclosure of conflicts, but requires advisors to put customer interests ahead of their own.
“What would you want somebody to be advising your sister, your brother, your son, your daughter, your parents–in their best interests?” Gensler said. “That’s just a common-sense way to think about it.”