Compliance Officials Gear Up for Changes in Customer-Care Standard
Consumer advocates have denigrated the Securities and Exchange Commission’s new Regulation Best Interest’s customer-care obligation as a “warmed-up suitability standard,” but even industry officials who have some sympathy with that opinion said the new standard will require meaningful compliance upgrades for many broker-dealers.“We will look at better ways to make investment objectives visible, to ask clients what they want to do in their lives and be aware of deviations,” Robert W. Baird & Co. Chief Compliance Officer Jeffry Freiburger said at a Compliance Outreach conference sponsored by the SEC and Finra last month. “Some things don’t exist today, and we will need to have them to prove our case out.”
In a follow-up interview, Freiburger said Baird is likely to have brokers conduct client reviews more frequently than the annual discussion now required to ensure that portfolios and account types mirror events such as divorce or retirement and changing risk tolerances. (The SEC’s books-and-records rule requires confirmation of recommendation suitability every three years, but many firms have adopted annual review requirements.)
“We may become more actively involved in talking to clients about what is going on in their lives, and to monitor differently,” he said. “Monitoring becomes more important, and we may need different analytics to help with more complicated reporting than in the past.”
SEC enforcement officials, meanwhile, are warning brokers and firms that it will be looking for violations of the existing suitability standard in the months leading up to June 30, 2020, date at which the new rules will be enforced, with particular regard to brokers who make recommendations that wouldn’t pass muster under Reg BI.
“Between now and implementation, this suitability concept and others are going to be looked at very closely,” Daniel Gregus, associate direction of the SEC’s clearance and settlement examination program said at the compliance conference.
Examiners will be sensitive to a rush to get customers to switch out of brokerage accounts subject to the elevated care standard into fee-based accounts, or to accelerate sales of complex products such as inverse leveraged ETFs and variable annuities before the effective enforcement date, he said.
Consumer advocates and fee-only registered investment advisers have criticized Reg BI as a cloak for brokers to market themselves as trusted “best-interest” advisers without subjecting them to the more rigorous fiduciary standard that is required of RIAs.
Reg BI is “a betrayal of the Mr. and Ms. 401(k) investors SEC Chairman Clayton pledged to protect when he launched this rulemaking,” Barbara Roper, director of investor protection at the Consumer Federation of America, said after the majority of SEC commissioners voted last month to adopt the new rules.
At the June 27th compliance conference, SEC Commissioner Hester Peirce countered that the new standard “will definitely help us to bring cases that we were not able to bring before against people who were not doing the right thing,” but agreed that it will require “a massive implementation process” by firms.
“It’s going to require you to think through a lot of the processes and procedures and supervisory arrangements that you have in place to make sure they’re consistent with the standard,” she said.
In its adopting release, the SEC said it will create an inter-divisional Standards of Conduct Implementation Committee to help firms work out procedures for complying with the new investor-protection regime. Broker-dealers must consider the costs of investment recommendations as part of their calculus of whether they are working in a customer’s best interest, the final rule said.