SEC's Clayton: Reg BI inspections to begin as soon as rule takes effect

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BOSTON — If brokers were hoping for a grace period with the SEC's new rule on advice standards, they can think again.

Once Regulation Best Interest takes effect next June, SEC and FINRA examiners plan to begin scrutinizing how firms are complying with the new rules, according to SEC Chairman Jay Clayton.

"When it's the law, we'll inspect against it," Clayton told Financial Planning after a town hall-style meeting he hosted on the regulatory package at the commission's Boston regional office.

"We're already working with FINRA on how best to inspect and implement it," Clayton said.

For advisors, Clayton noted that the commission's new fiduciary interpretation is already in effect.

Clayton was visiting the Boston office as part of a series of outreach events he and commission staffers are conducting to promote the new regulation and engage the investing public on the differences between the broker and advisory businesses, and how the rules are intended to help investors navigate the industry.

The commission drafted the rules with the intent of striking a balance that would enhance investor protection while preserving access to two distinct business models that each serve important segments of the market, Clayton said.

That compromise has left fiduciary advocates crying foul. The new rules, critics argue, effectively provide cover for brokers to continue to profit from dubious recommendations provided they make the requisite disclosures. The regulatory changes also downgrade RIAs’ fiduciary duty, critics say.

“We've faulted Reg BI for allowing firms to artificially create conflicts that undermine the best interest standard, and for failing to do anything meaningful to ensure those conflicts don't taint recommendations,” Barbara Roper, director of investor protection at the Consumer Federation of America, tweeted this week.

Early on in the SEC's development of Reg BI and the other parts of the package, Clayton settled on preserving a two-tiered approach that affirms the distinctions between brokers and investment advisors. He rejected calls for a blanket fiduciary standard to cover the entire advice industry.

At the same time, he acknowledges that there is widespread confusion about how the two models operate, particularly in the area of commissions, fees and other forms of compensation. The SEC included in its rulemaking package a new disclosure requirement called Form CRS — a brief relationship summary where brokers and advisors explain the services they offer, how they are paid, and provide information about their conflicts of interest.

The IA-BD distinction becomes even muddier in the case of dual registrants who wear both hats — a segment of the advice industry that manages roughly 70% of all retail assets, according to Clayton.

"I admit that this is one of the confusing parts of all this," he said. "What we want retail investors to be able to understand is what services they're getting and how they're paid, and there's been a great deal of confusion around those two questions for too long."

Clayton becomes animated when he hears about some of the more egregious examples of advisors or brokers fleecing their clients, and urges investors to become more proactive in evaluating financial professionals and how they are compensated.

"Ask them how much of my money is going to work for me," Clayton told attendees at the town hall meeting. "Investors do not mind paying for good investment advice, but you shouldn't pay more than you have to, and you should know how much you pay."

"It really upsets me," he added, "when investors ask about fees and the answer is 'it's complicated.' "

"No, that's not the right answer," Clayton said.

The SEC is promoting its website as a portal where consumers can access the records of their brokers and advisors maintained by the SEC and FINRA, along with other resources to help them navigate the personal advice market, including information about the SEC's new regulation. Clayton said that the commission is planning to expand the resources on that site with a series of videos on issues such as the differences between brokers and advisors and questions for investors to pose to a prospective financial professional.

Brokers and advisors should also look at Form CRS as a representation of their practice that examiners will scrutinize when they are reviewing a firm.

Clayton rejects the criticism that Reg BI was in effect a gift to the brokerage industry. Wall Street has generally welcomed the rulemaking package in sharp contrast to its strident opposition to fiduciary rules promulgated by the Department of Labor and state regulators. Clayton insists that examiners will hold firms accountable for complying with the rules and adhering to the representations they make in Form CRS and other materials.

"I want investment professionals to worry about this," he said.

For brokers, Reg BI sets out obligations around disclosure, care, conflicts of interest and compliance, each of which could become a checkbox for examiners when they are visiting a firm and preparing a deficiency letter.

"Rules are great," Clayton said, "but you have to be able to inspect for them and enforce them."

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Regulation Best Interest Regulatory actions and programs Regulatory guidance Compliance Jay Clayton Barbara Roper SEC FINRA