While compliance efforts by
the industry and the regulators are in full swing, the democrats’ presumptive
presidential nominee, Joe Biden, is threatening Reg BI’s future.
He vowed in his recent party platform plan to “take
immediate action to reverse the Trump Administration’s regulations allowing
financial advisors to prioritize their self-interest over their clients’
financial well being” — an apparent reference to Reg BI and the Labor
Department’s fiduciary prohibited transaction exemption intended to align with
it. (The comment period on Labor’s PTE expires on Aug. 6.)
Valerie Mirko, a partner in Baker McKenzie’s Financial
Regulation and Enforcement Practice Group in Washington, tells Human Capital
that while Reg BI enforcement won’t kick in this year, advisors can expect
exams from the SEC and FINRA as well as another set of frequently asked
questions guidance from the SEC before year-end.
Mirko doesn’t expect Reg BI enforcement “to happen very
quickly” — not this year — but after the SEC’s Office of Compliance Inspections
and Examinations and FINRA’s exam program conduct a “very thorough policies and
procedures set of exams on a remote basis, look at those findings, see where
the industry is in terms of practices” they’ll “adapt FAQs.”
While FINRA statements regarding Reg BI compliance “have
tracked very closely” to the SEC’s, “I would expect the FAQs from the SEC,”
Mirko says. Reg BI is “a complicated rule with a lot of parts. … Now is the
time to see where there needs to be more clarity.”
Reg BI is a principles based rule with critics arguing the
rule is not defined. Reg BI was written for broker-dealers that have had a
“more prescriptive regime in terms of rules that they comply with,” Mirko says.
However, “keeping [Reg BI] as a principles-based regime is important because
it’s meant for different business models.”
As to Labor’s PTE to align with Reg BI, “I think the
proposal is an improvement over the last two iterations” Labor issued.
“Remember, the last time Labor put out a proposal there was no Reg BI construct
in place.” Labor’s new PTE “takes into account a best-interest standard, takes
into account Reg BI compliance or Investment Adviser Act fiduciary duty
compliance to fulfill the DOL best-interest obligation.”
Firms will need to “add on” to their compliance programs
should the proposed exemption become effective, Mirko says.
The rule “has a strong disclosure component,” which was not
part of the last two fiduciary rules and “is generally not the case with the
regime. I think right there this proposal is making a concerted and thoughtful
effort, while it is an ERISA proposal, to align with the securities framework.”
That said, “it still will be a lift for firms to comply with
an additional regulation.”
Massachusetts’ Fiduciary Rule
Of course, Massachusetts’ fiduciary rule has a Sept. 1
enforcement date — creating another fiduciary compliance layer. “One of the key
questions under the Massachusetts rule is whether the fiduciary standard is
episodic, meaning that it only applies at the time of the recommendation or
whether there is an ongoing duty that extends beyond the time of the
recommendation,” Mirko explains.
The DOL plan, meanwhile, “raises the question of whether a
firm can be a fiduciary under ERISA and the tax code but still provide episodic
advice under the Massachusetts fiduciary rule,” Mirko points out.
“All eyes are on what happens” as the Massachusetts rule
takes effect, she said. “I would expect other states to look toward how
Massachusetts implementation and enforcement plays out.”
The state next in line to potentially approve a rule is New
Jersey, but that rulemaking is paused due to COVID-19.
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