August 28, 2019

Jim Lundy and Fred Reish Discuss Compliance with SEC Advice-Standards Package and Possible FINRA Rule Changes

With the deadline for compliance with Reg BI and Form CRS rapidly approaching, industry publication ThinkAdvisor provided coverage from Best Interest Compliance attorneys on where broker-dealers and advisers stand in the process.

During Drinker Biddle’s July Inside the Beltway webcast, Fred Reish stated that his “gut-level feeling” is that BDs are “already behind schedule,” despite the fact that Reg BI isn’t enforced until July 30, 2020. “There’s so much there that it’s going to be really hard to comply.”

The final Reg BI requires BDs to consider “cost of investments and investment strategies every time a strategy is recommended to a retail client,” Reish said. Broker-dealers now will be required to go over their processes for considering costs when it comes to recommending a variable annuity as well as the third-party recommendation regarding mutual funds, he explained. “What’s the process? Then the training and the policies and procedures” have to be developed.

This new requirement has BDs now mulling “adding monitoring to part of their contractual obligation,” Reish said.

Registered investment advisors need to “get going” on their compliance with the SEC’s advice-standards package this fall, Reish advised, “because, from my perspective, the SEC is taking a much broader view of conflicts of interest.”

For example, if an RIA recommends that an investor refer an IRA to them, “if the investor agrees to transfer the IRA, the [RIA] makes more money than if they didn’t transfer,” which amounts to a “conflict of interest recommendation that results in a benefit to the RIA,” Reish said. “Where is that disclosed to the clients? Is it in the [Form] ADV?”

FINRA — the enforcer and examiner of Reg BI — also is mulling changes to its rulebook in light of the SEC’s new rule.

Jim Lundy told InvestmentAdvisor that it’s unclear if FINRA “will finalize rules and examine and enforce for those rules as well.” He said the self regulator could issue a rule before or after Reg BI’s June 30, 2020, effective date.

FINRA’s Reg BI webpage also states that the organization will review its “rules to see whether changes are needed to align FINRA rules with the SEC’s rulemaking,” and that any proposed changes will be filed with the SEC for public comment and available on FINRA’s website.

Lundy stated that while FINRA’s “notice advising its members to contact the SEC and to work with FINRA is a positive, it’s unclear, and even unclear in the Notice and on the FINRA website, whether or not FINRA will, in fact, finalize rules that will fall under Reg BI.”

In the meantime, Lundy continued, FINRA has “been very clear they plan to work with the SEC and member firms to get into compliance and educate their staff on exams and how it [Reg BI] will be enforced.”

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