After SEC’s first wave of Reg BI cases, FSI praises rule’s implementation

In a rare display of an industry trade group’s support for new regulation and enforcement, independent wealth managers are praising the SEC’s Regulation Best Interest.

More than 80 independent broker-dealers and almost 30,000 financial advisors represented by the Financial Services Institute remain supportive of the regulation that went into effect in June 2019. Reg BI required firms to file and post a new “client or customer relationship summary,” or Form CRS, by the end of June 2020.

With the Biden administration getting its chance to leave its own mark on the Trump administration’s rule, industry groups are lining up to defend the new standard and warn against enforcement that changes Reg BI without a formal process. Citing examples such as the SEC's roughly 100 conflict of interest disclosure cases in recent years, FSI members are concerned that strong enforcement of the new standard could bring bigger teeth to Reg BI without giving them and other stakeholders time to comment and exert influence over any adjustments.

Executives and officials with FSI discussed the rule July 27 at the organization’s OneVoice conference the day after the SEC announced its first significant wave of enforcement actions under Reg BI against 21 RIAs and six BDs. The 27 firms agreed to pay a combined $910,092 — or roughly $33,700 per company — after the regulator alleged they missed the Form CRS deadline. Although the FSI executives declined to comment on the specific allegations, they noted that the organization’s approval of the rule comes with a caveat.

“Reg BI implementation last year was a significant positive development for our members,” said FSI Deputy General Counsel Robin Traxler. “We're working closely with our members to monitor how Reg BI is being examined and enforced so far. If we feel like the SEC or other regulators are once again engaging in rulemaking by enforcement, we are prepared to engage quickly on that.”

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Critics of Reg BI have panned it as a watered-down version of the Obama administration’s fiduciary rule, which would have placed most brokerage services under the same standards as advisory ones. FSI and other business groups successfully challenged the Labor Department’s fiduciary rule in court in 2018. Advocates for the previous rule view the new Form CRS documents as too complicated for retail clients to grasp, and they’re expressing hope that the Biden administration will tweak the disclosure document in a way that more simply explains the difference between the required duties to clients governing brokerage and advisory accounts.

“These SEC actions are important,” Knut Rostad, president of the Institute for the Fiduciary Standard, said in an emailed statement on the enforcement cases. “Yet, they are also just first steps. CRS needs major reconstructive surgery to fulfill its purpose. The SEC knows this well; next steps are sure to come.”

The largest civil monetary penalties ordered by the SEC in the more than two dozen settlements amounted to $97,523, which four firms agreed to pay: Cohen Klingenstein, Embree Financial Group, Minot DeBlois Advisors and Paratus Financial. The SEC ordered Tradier Brokerage and The Cavanaugh Group to each pay $50,000 in separate settlements. All six firms failed to meet the June 30, 2020, deadline to deliver Form CRS to the SEC and post the document on their websites, according to the SEC. Investigators say each firm was at least six months late.

None of the firms immediately responded to phone and email inquiries about their settlements. Like the other 21 companies settling with the regulator, though, they didn’t accept or deny the regulator’s allegations.

“Form CRS is intended to provide retail investors with a brief summary about the services a firm offers, its fees, conflicts of interest and other information that can help investors make more informed choices,” Adam Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement. “By failing to file, deliver and post this form, these firms deprived their clients and customers of the benefits of that information.”

While FSI CEO Dale Brown said he hadn’t reviewed the details of the cases, he says independent wealth managers are wary of any regulatory actions that alter the rule without engaging in a formal rulemaking process.

“The rule's not effective if firms don't abide by it, so from that standpoint I think it's good,” Brown said. “And we're going to continue — because of the SEC's unfortunate track record of using their extensive enforcement powers to change the rules in the middle of the game — we're going to keep a close eye because it will not support effectiveness of Reg BI if they're rewriting it through only the enforcement side of the equation.”