Page 40 - Investment Advisor - December 2021

firms that recommended variable annui- and care, disclosure, or conflict manage- ized, firms maintained those material
ties, and 52% of firms that recommended ment.” It “concludes that firms are not changes because they would also help the
non-traded real estate investment trusts. providing ‘fair and balanced point-of- firm comply with Reg BI,” Bentsen said.
• Only 35% of BDs surveyed that rec- sale disclosures regarding fees, costs, and “The report fails to recognize these sig-
ommended complex, costly and risky risk to retail investors,’” Edmiston said. nificant changes made in response to Reg
products after Reg BI took effect reduced He maintained that enforcement BI, thereby discounting the true benefits
the financial reward associated with these actions are warranted. “It is incumbent delivered by Reg BI in terms of the posi-
products by capping agent sales credits. upon the SEC to offer clearer guidance tive changes it inspired and requires.”
as to what is expected of firms and what Reg BI, Bentsen said, “is the law,
HOW SHOULD THE SEC RESPOND? conduct is unacceptable. It is also time and it has meaningfully raised the bar
“It is early, and I think [broker-dealers for the SEC, the states and FINRA to for financial professionals, and includes
have] done what they thought they needed bring enforcement actions against those many important investor protections
to do. But now the ball is back in the firms which, a year in, have not yet while preserving investors’ choices.”
regulators’ court,” Seidt said on the
call. “Reg BI sinks or swims based Forty percent of BDs surveyed SEC REG BI DEFICIENCY
on what securities regulators do, that recommended leveraged LETTERS, ENFORCEMENT
now that we are aware of that firm ACTIONS
inaction. We need to help the firms or inverse exchange-traded Issa Hanna, counsel at Eversheds
move the needle and close the gaps Sutherland, told me in an inter-
that remain between Reg BI and funds had compensation view that SEC deficiency letters
fiduciary firms.” conflicts, as did 41% of firms regarding Reg BI “are starting
Seidt continued, “I don’t think to come out.” The two areas the
it’s really necessary to reform that recommended private SEC has been hitting on consis-
or revise or amend the [Reg BI] securities, 44% of firms tently in the letters, Hanna said,
rule. It really is time for the SEC are “reasonably available alter-
to clarify its expectation by issu- that recommended variable natives and policies and proce-
ing supplemental guidance.” dures around conflicts.”
The regulator, she said, received annuities, and 52% of firms Jim Lundy, a partner at Faegre
an advance copy of the Phase Two that recommended non-traded Drinker’s Chicago office, said that
report, and NASAA wants to coor- the SEC’s Division of Examinations
dinate with the securities regulator real estate investment trusts. “issuing substantive Reg BI defi-
in the coming year on a response. ciency letters around this time is
When asked whether the deficiencies implemented any changes to their poli- not a surprise.” Rather, Lundy said, “this
cited in the Phase Two report warrant cies, procedures and practices.” is part of the ongoing evolution of the SEC
enforcement action, Seidt responded: Ken Bentsen, president and CEO of the continuing to assess firms’ implementation
“We don’t anticipate the states to take Securities Industry and Financial Markets of and compliance with Reg BI.”
early enforcement actions. There needs Association, said that SIFMA appreciates Lundy said to expect the SEC’s
to be stronger and clearer guidance. A “that the NASAA report and NASAA lead- Division of Enforcement to start bring-
lot of it now is coaching and a redirec- ership recognize that firms have adjusted ing enforcement actions against firms
tion at the examination stage.” their policies and procedures to be com- for Reg BI violations in 2022.
pliant with the federal law that Reg Best “At the end of June 2022, we will be
PIABA, SIFMA WEIGH IN interest is and that the vast majority of two years out from the implementation
Michael Edmiston, the new president firms are headed in the right direction.” date” of Reg BI, Lundy continued. “That
of the Public Investors Advocate Bar He added, however, that “the report miss- timing is about right for the Division
Association, or PIABA, said NASAA’s es the mark in terms of the numerous and of Examinations to complete examina-
report shows that Reg BI “has not substantial changes that firms have made tion cycles for Reg BI, determine which
improved the standards of conduct. The to enhance investor protection and satisfy fact patterns and firms warrant enforce-
very set of rules the brokerage industry the best interests of their retail investors.” ment referral consideration, and for the
supported are now being ignored.” Firms began making those beneficial Division of Enforcement to conduct
NASAA’s report, Edmiston said, changes in 2015 and 2016, when the investigations.”
“demonstrates that many firms have not now-vacated Department of Labor fidu-
changed their policies, procedures and ciary rule came out. Washington Bureau Chief Melanie Waddell
practices in the areas of due diligence “In mid-2019 when Reg BI was final- can be reached at [email protected].

38 INVESTMENT ADVISOR DECEMBER 2021 | ThinkAdvisor.com