Regulation Best Interest (Reg BI) is a relatively new rule from the United States Securities and Exchange Commission (SEC) that requires a clear distinction between financial professionals who claim to be advisors. In an effort to better protect clients, this rule requires only those held to a fiduciary standard of care to call themselves advisors.
But is it working? Are brokers complying with this new regulation?
Advocates are voicing concern after the results of the Financial Industry Regulatory Authority (FINRA) exam findings. These exams were part of the group’s annual report. The portions involving Reg BI found numerous areas that came up short of expectations, including:
- Best interest. The exam findings report multiple instances of brokerages not acting in the best interest of their clients.
- Conflicts of interest. FINRA also found failures to mitigate potential conflicts of interest.
These concerns are supported by another report. This one, from the North American Securities Administrators Association (NASAA), also found Reg BI fails to properly address brokers’ conflict of interest when selling investment tools.
Fiduciary advocates are calling for additional changes, stating Reg BI has failed to properly protect investors. SEC Chairman, Gary Gensler has said the fed’s use of examinations, enforcement and guidance is sufficient to ensure the regulation is working to protect investors.
Even without additional regulatory efforts, brokers are wise to take note of advocates calling for increased efforts from the SEC — because the feds have noticed and are likely to respond. The NASAA also reports that the majority of firms had not really changed their practices since Reg BI went into effect. This, along with the criticism noted above, will likely trigger additional Reg BI investigations and penalties from the SEC.