After more small Reg BI cases, when will the SEC’s hammer come down?

After 42 small cases involving firms that aren’t household names in wealth management, financial advisors are wondering when the SEC will ramp up enforcement of its new rule.

The signs that Chair Gary Gensler’s team plans to, in his words, ensure “that Regulation Best Interest lives up to the promise of its name,” through tougher compliance cases have piled up since the beginning of the Biden Administration last year. After Gensler hired 35-year investor champion Barbara Roper of the Consumer Federation of America, state regulators, the SEC and FINRA have each found widespread problems with Reg BI compliance.

But 12 settlements that average $24,000 in civil penalties that the SEC ordered small RIAs and brokerages to pay last week fall well short of the kind of enforcement feared by the industry and sought by consumer advocates. The cases join the 30 other similar ones under Reg BI so far levying penalties that wouldn’t cause much of an impact to giant wealth managers that can generate up to 10 digits in annual profits.

A clearer picture of Reg BI is slowly emerging after the rule’s June 2020 implementation, according to Compliance Risk Concepts founder Mitch Avnet. Advisors and wealth managers should view the cases as “a wakeup call for those who need to strengthen their programs” and “a roadmap” for other firms to compare their own processes against the firms in the cases, he said.

“There was not a lot of clarity around this when we went live,” Avnet said. “There's more work that needs to get done here from an industry perspective, but I think, in terms of where we started and where we're going, there haven’t been a lot of surprises. Regulators are never going to tell you how to get from A to B, they're just going to tell you they expect you to. … Anytime you have new regulation there's going to be a grace period in terms of when regulators start enforcement actions.”

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It could take several more years before advisors and the industry at large get a sense of how Reg BI might ultimately change the standards of care, according to Skip Schweiss, CEO of Sierra Investment Management and a board member of the Financial Planning Association. The rule has altered the duty of brokers to their clients above the prior suitability standard, but the question remains whether it could force the elimination of certain conflicts of interest, he said.

“You have to give this thing five years. You have to see what kind of cases the SEC is going to bring,” said Schweiss, who joined Sierra in October after serving as the managing director of advisor advocacy at TD Ameritrade. “It’s an elevation, but what does it actually mean? The industry complained a lot about [the fact that] there's no real definition as to what best interest means.”

Representatives for the SEC didn’t respond to requests for comment. Gensler hasn’t shown or played his hand on Reg BI, sharing few details about any possible moves in his brief public comments about the rule. This fall, he said the SEC is considering whether Reg BI may need updates in light of new “digital engagement practices” and “gamification” in investing.

“We have significant tools and examinations across the agency to try to ensure that regulation best interest means just that — when a broker makes a recommendation, it's in your best interest, the investing public,” Gensler said at an event in October. “We're going to do what we can to basically get the best out of best interest. And secondly, we're also working on these digital engagement practices across the broker and the investment advisor space.”

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The latest swath of cases doesn't paint very much of a picture in that regard, other than alleging the dozen firms flouted the rule’s most basic requirement by failing to deliver their new Customer Relationship Summary forms to clients and post them on their websites. The firm that agreed to pay the largest civil penalty of the bunch at $97,523 — a wealth manager, fixed-income trading and offering execution firm called Wall Street Access — missed the Form CRS deadline by about 16 months, according to the SEC’s Feb. 15 settlement order.

"With today’s actions, the SEC has now charged 42 financial firms for failing to meet the obligations that are required to ensure retail investors understand their relationships with their securities industry professionals," SEC Deputy Enforcement Director Sanjay Wadhwa said in a statement. "We urge firms that continue to be delinquent in fulfilling their Form CRS obligations to come into compliance with the law and to self-report to the SEC."

Wall Street Access didn’t confirm or deny the allegations as part of settling the case. Representatives for the New York-based brokerage, one of five firms that have agreed to penalties of $97,523 under the 42 Form CRS cases, didn’t respond to requests for comment.

Schweiss counts himself a fan of Reg BI “generally” for raising the previous standard governing brokers to acting in their clients’ best interest, he said. He views Form CRS as “a noble endeavor by the SEC” to help clients better grasp the differences between brokers and advisors and why the fiduciary standard is the stricter one than suitability and the new best interest duty, Schweiss said. Unfortunately, the Form CRS currently “blurs the distinction and has the potential to confuse investors more,” he said.

“It's not accomplishing its purpose,” said Schweiss. “Form CRS is one area where, if I had to guess, there will be some changes down the road at some point.”