Wealth managers are still wrapping their arms around the SEC’s Regulation Best Interest, even as they try to discredit the view that the 2020 rule hasn’t
That was the main takeaway from a May 18 panel at FINRA’s annual conference featuring two industry governors from the regulator’s board in Commonwealth Financial Network General Counsel Peggy Ho and Herold & Lantern Investments Chief Compliance Officer Wendy Lanton, as well as executives from Morgan Stanley and Goldman Sachs. They spoke a day after SEC Chair Gary Gensler offered his latest
The memo reflects “a very interesting evolution” from the difference between advisory accounts subject to fiduciary rules and brokerage services under the suitability standard prior to Reg BI, according to Ho, who remarked that she felt as if she should apologize to the audience for continuing to talk about the topic after
“I'm with a small firm. What we do is we say, ‘OK, what are the conflicts that we can get rid of?’ Do we offer proprietary products? No. Do we have reps that get compensated at different levels for different products and services? No,” she said. “Those are inherent, but not every conflict can you actually get rid of. And that, to me, is very worrying for the industry, because it sounds like what Chairman Gensler was saying — and this is just my opinion — is that so much of this is going more toward a commonality of a fiduciary standard without actually saying, ‘This a fiduciary standard.’ We get compensated on the brokerage side, not in a fiduciary capacity. And I think that it kind of hangs a cloud over things.”
The SEC speaks
Gensler, who
“Under Reg BI and the [R]IA fiduciary standard, when a broker or an advisor provides advice, digitally or otherwise, they must act in the best interests of their clients and not place their own interests ahead of their clients’ interests,” he said. “Brokers and advisors need to prevent their own interests from inappropriately influencing their recommendations and advice. If they can’t do that, they have decisions to make — eliminate the conflict, don’t give the advice or find some other way to ensure that they don’t put their interests ahead of the retail investor’s interests.”
Advisors, he added, have “a critical role to play” as firms “take investor protection and compliance obligations seriously, reining in or curing any conflicts and really delivering the best interest advice that investors so need and deserve.” That, Gensler concluded in an echo of his
If the rhetoric didn’t add enough uncertainty to the mix for wealth managers seeking the regulator’s stance on whether they must alter certain practices and stop selling some products in particular, the staff bulletin weeks earlier supplied plenty of the same.
Reg BI and fiduciary rules for RIAs “are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest,” the bulletin states. “Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.”
Firms’ implementation
The executives from the firms participating in the FINRA panel offered more concrete examples of how they have altered their practices under Reg BI, with some admitting that there have been bigger shifts than they expected going into the process. Morgan Stanley’s institutional side of the business was “pretty relaxed about it” compared to the firm’s retail-facing channel, according to Belinda Blaine, the head of compliance regulatory strategy for the firm’s Institutional Securities unit. Then they came to the example of private placements, she said.
“Clearly, it’s a fine line,” Blaine said. “We would take the legal position we're not making recommendations, but we have papered that private placement area very carefully because every now and then we'll have FAs referring people over to our institutional side and we really don't want to become a retail business, per se. So the documentation there is quite extensive in terms of what the client understands and their background and so on. So that is actually an evolution that I've seen from the other side. And it's been quite an education.”
At Goldman Sachs, the firm no longer offers some products to brokerage clients under Reg BI, said John O’Connell, the global head of the firm’s Regulatory Practice Group. In addition, it has created the infrastructure necessary to oversee recommendations to prospective clients.
“It was a little bit of a shift — the idea that you need to make disclosures and ensure disclosures are sent to prospects before recommendations can be made,” O’Connell said. “It's important that we have controls, detective controls to make sure people are doing this right. And so we had to build that out. We do forensic reviews to try to determine if there are conversations with prospective clients or email conversations, at least with prospective clients. And then we go back and check that the disclosure actually gets sent out before that happens. So there's that whole piece of it, too, on the back end, in terms of oversight.”
For Commonwealth, the process has revolved around helping advisors comply with the rule and, more specifically, the recent staff bulletin, Ho said. She credits “an incredible partnership between legal compliance and our operations team” to develop training and guides, she said.
“You need to know the client and know who they are so that you can provide advice in their best interest,” Ho said. “You need to have a way to consider all reasonable alternatives. And, as a firm, we've tried to provide support so they can do that. You need to document. The staff bulletin was very clear around, documenting is no longer just best practice. You kind of have to do it, right? And so we've been working very hard with our systems and our processes to make it easy for our advisors to be able to do that.”
Smaller firms like Herold & Lantern don’t have the technological capabilities available to larger ones when trying to document available alternatives, Lanton pointed out. The bigger lingering issue stems from all of the questions that come up when compliance officials and wealth management executives read through Reg BI and the SEC’s guidance, she said.
“Ultimately, I don't think anything new has happened,” Lanton said. “Unfortunately you just read it over and over and over again to take out those little juicy tidbits. But as an industry, we're all thirsty for knowledge. That's why we're here. We're here because we care. We're here because we want to get it right.”
