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Is Reg BI Working? It Depends On How You Read FINRA’s Report

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This article originally appeared on InvestmentNews by Mark Schoeff Jr.

Whether Regulation Best Interest is working after 20 months depends in part on how readers interpret a report released last week by Finra.

The Financial Industry Regulatory Authority Inc. included a section about Reg BI compliance in its annual report on its examination program. The broker-dealer self-regulator outlined on pages 26-27 its findings from Reg BI exams, most of which involved shortcomings like brokerages not acting in their customers’ best interests and failing to mitigate conflicts of interest.

Finra followed the exam findings with a section on pages 28-29 titled “effective practices,” such as identifying and addressing conflicts related to compensation arrangements and limiting the sale of high-risk and complex investments to retail investors.

The language in the report didn’t make clear whether the exam findings were separate from the effective practices. But Finra said the sections are related.

[…]

Fiduciary advocates have zeroed in on the exam findings to argue Reg BI isn’t living up to its investor protection promises. The standard of conduct, which went into force in June 2020, prohibits registered representatives from putting their financial interests ahead of their customers’ interests. Investment advisers continue to adhere to fiduciary duty when working with clients.

“The findings language … clearly cites material deficiencies that result in recommendations that fail to make the best interest standard,” Knut Rostad, president of the Institute for the Fiduciary Standard, said during a media briefing Tuesday. “There should be no mystery why B-Ds flunked. B-Ds were asked to craft and implement practices and policies without knowledge and guidance to describe what the [Reg BI] standard really means.”

But an industry representative said the Finra exams produced a different conclusion.

“The report is telling us Reg BI is working,” said Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “There are things firms are doing well and there are things firms are not doing as well. Finra is not concluding there are widespread failures. That is not the case.”

[…]

“Regulation Best Interest is not doing its job,” Benjamin Edwards, a professor at the University of Nevada-Las Vegas law school, said Wednesday during the Institute for the Fiduciary Standard’s media briefing. “We’ve had enough time to see the truth, and the truth is brokerage firms’ operations have largely gone unchanged. This is happening because oftentimes the business model smacks of betrayal. Brokers are getting more money for tilting their advice in favor of more expensive products.”

Read the full article at InvestmentNews

Dan Moisand

 

Dan Moisand is a nationally recognized fiduciary fee-only financial planner, an Institute Real Fiduciary™ Advisor and Chair-elect of the CFP Board.

The Institute has enshrined the ‘Moisand Rule’ on fiduciary practices. It is basic and is more important today than ever: “You have to avoid conflicts. If I avoid a conflict, I don’t worry about it.”

Watch the video of Moisand speaking here.

Bob Veres

 

Bob Veres is a long term observer of financial planning. His Newsletter, “Inside information” Is a staple of leading planners. In the May edition he writes about fiduciary and the Institute.

"But a much bigger point is that the fiduciary standard—as Knut Rostad of the Institute for the Fiduciary Standard has pointed out—has been determined by the Supreme Court (1963 ruling) to be at the very heart of the Investment Advisers Act of 1940. It is the foundation of what it means to be an RIA registered with the SEC instead of a tipster or a tout."

- Bob Veres, Parting Thoughts ... The SEC's Own Compliance Culture