Page 39 - Investment Advisor - December 2021

THE PLAYING FIELD

By Melanie Waddell

Reg BI Report Zooms in on BDs’ Lack of Compliance

NASAA finds 65% of firms aren’t discussing lower-cost or lower-risk products.

roker-dealer compliance with ined in phase one and phase two of the
the Securities and Exchange initiative and have transitioned from the
BCommission Regulation Best suitability standard to the new, best inter-
Interest is falling short, according to est standard of care, NASAA explained.
state securities regulators. These 225 firms serve more than 77.5
The North American Securities million retail accounts and employ over
Administrators Association’s 2021 Reg 316,000 registered reps, NASAA said.
BI Phase Two Report, released in early Some notable findings from the 2021
November, follows the group’s 2020 Reg BI Phase Two report include:
Phase One Report, which analyzed finan- • The percentage of BDs surveyed
cial services industry policies and practices that were offering complex, costly and
prior to the implementation of Reg BI. risky products increased by 11% after
Melanie Lubin, NASAA president and Reg BI took effect.
Maryland securities commissioner, said • Sixty-five percent of BDs surveyed
on a call with reporters that NASAA’s are not discussing lower-cost or lower-
‘Some firms are headed latest report shows that “while there has risk products with their customers when
in the right direction, been incremental progress [in Reg BI com- they recommend these types of products.
• No more than 4% of BDs surveyed
pliance], broker-dealer firms still are not
but Reg BI has a long abiding by the Reg BI rule now in effect.” had enhanced their investor profile
way to go to close the State securities regulators, Lubin said, forms (in any key metric measured) to
investor protection “did not see the tide-turning reforms more carefully match investors with
they had expected to see in the broker-
products after Reg BI took effect.
gap separating broker- dealer industry” after Reg BI took effect. • Three percent of BDs surveyed
The 2021 report “reveals that while
dealers from investment there were some improvements, most took a step backward from their prior
suitability procedures by dropping cus-
advisors when it comes firms are operating in the same manner tomer education, longevity risk and
to conflicted advice.’ as they were under the suitability rule, tolerance for alternative products from
especially when it comes to harmful their investor profile forms.
—Andrea Seidt, NASAA’s compensation conflicts,” she explained. • From 24% to 30% of BDs surveyed
Reg BI Implementation Andrea Seidt, chair of NASAA’s were still utilizing product-agnostic sales
Committee chair Regulation Best Interest Implementation contests, differential compensation and
Committee and Ohio securities com- extra forms of compensation. These com-
missioner, added that “some firms are pensation conflicts are rarely seen in fidu-
headed in the right direction, but Reg BI ciary firms, observed in only 0.5%-3% of
has a long way to go to close the inves- investment advisors examined in Phase I.
tor protection gap separating broker- Compensation conflicts were concen-
dealers from investment advisors when trated in firms that recommended com-
it comes to conflicted advice.” plex, costly and risky products after Reg
BI took effect.
NOTABLE FINDINGS • Forty percent of BDs surveyed that
State examiners from 35 jurisdictions recommended leveraged or inverse
examined 443 broker-dealer firms in the exchange-traded funds had compensa-
2021 report, which focuses on the prog- tion conflicts, as did 41% of firms that
ress made by 225 firms that were exam- recommended private securities, 44% of

DECEMBER 2021 INVESTMENT ADVISOR 37