How firms and regulators are preparing for Reg BI’s ‘significant impact’

FINRA CEO Robert Cook (right) discussed Reg BI with NASAA President Michael Pieciak at the state regulator organization's annual meeting in Austin, Texas.
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AUSTIN, Texas — The SEC’s Regulation Best Interest has put changes in motion for firms and regulators at all levels — but some x-factors could alter the complex equation.

Seven states filed a federal lawsuit on Sept. 9 seeking to block Reg BI ahead of its June 30 effective date. In addition, at least three states have their own pending fiduciary rules that resemble the vacated Department of Labor rule’s heightened standards of conduct.

For now, firms like Prudential Advisors, state regulators and FINRA are preparing for Reg BI as it stands. At the North American Securities Administrators Association’s annual meeting, President Michael Pieciak said the “laundry list kept growing” as a state task force assessed the next steps.

In a session with Pieciak at the conference, FINRA CEO Robert Cook said Reg BI would prompt changes to the regulator’s guidelines like aligning non-cash compensation rules with the SEC’s ban on sales contests under the new standard. Reg BI is also shifting the regulator’s examiners away from using the current suitability standard for broker recommendations.

“That was our rule, but this is not our rule,” Cook said. “We need to empower [examiners] to train and everything else and develop a really good process with the SEC to make sure that the interpretive questions come up in the exam process...I don't want us to be interpreting the rule now.”

Firms should already be considering how best to adjust their policies and procedures, according to Prudential Advisors Chief Legal Officer Hasan Ibrahim. In another panel, he thanked regulators for efforts to release guidance on the rule.

“Already we have a ton of worksheets put together to start addressing how this looks,” Ibrahim said. “It's an extremely tight timeframe. The clarity is welcomed, but it's a big haul for a lot of firms to make sure they're compliant by July 2020.”

He said later in the panel that state-level laws could become a “hiccup” in the process. While a bill in Maryland failed to pass its General Assembly, pending rules issued in New Jersey, Massachusetts and Nevada have encountered strong opposition from brokerages and insurers.

NASAA has supported the states' endeavors, though. NASAA President-elect Chris Gerold, the chief of the New Jersey Bureau of Securities, said in an interview he couldn’t discuss the potential New Jersey rule during its public comment period. He did discuss NASAA’s stance in general.

“NASAA is supportive of states' rights to regulate the securities industry standards of care as they feel the need to,” Gerold said. Consumer advocates who supported the Department of Labor rule have also lined up behind the state-level fiduciary standards.

Still, regulators point out that Reg BI won’t maintain the status quo for broker-dealers. It will make “a very significant impact” on BDs, according to Pete Driscoll, the director of the SEC’s Office of Compliance Inspections and Examinations and a member of an SEC task force on the rule.

“As people go down that road, we want to ensure that the industry and the broker-dealers are getting guidance they need to appropriately adopt it,” said Driscoll. He added that the SEC was fielding questions from firms and would issue FAQs “on a regular basis” before the effective date.

The rule could have “ripple effects,” according to FINRA Head of Enforcement Susan Schroeder, who said that the regulator’s first task is to “make sure we understand the parameters of the rule.”

“I certainly am not going to be enforcing the rule according to my moral conscience,” she added.

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Regulation Best Interest Compliance Exams Regulatory guidance Enforcement FINRA NASAA SEC