When Regulation Best Interest (Reg BI) went into effect in June of 2020, it was intended to hold brokers to a higher standard while requiring them to act in the best interests of their retail customers when making investment recommendations. Despite this being the new standard of conduct for more than a year, many brokerages are continuing to demonstrate conflicts of interest when making these types of recommendations. This conclusion was drawn from a recent study conducted by the North American Securities Administration Association (NASAA).
Since Reg BI first came into the picture in 2018, NASAA has conducted a two-part review of more than 400 firms from 35 jurisdictions. The first phase examined the policies, procedures and practices firms had in place prior to the implementation of Reg BI, while the second phase reevaluated these operations one year following the implementation date. During the second phase, NASAA’s Reg BI Implementation Committee (the “Committee”) specifically analyzed firms in the areas of due diligence and care, disclosure, and conflict management.
While the study showed that some firms had made efforts to engage in pro-investor best practices, as opposed to harmful conflicts, the findings ultimately showed that most firms “remained fairly stagnant” and were operating the same under Reg BI as they were under the suitability rule. Moreover, the report showed that even the Reg BI firms that showed some progress were still falling short of the fiduciary marker.
After a full year of operating under the new standard, NASAA found that most of the Reg BI firms sampled are not providing “fair and balanced point-of-sale disclosure regarding fees, costs, and risk to retail investors.” Additionally, the report found that several Reg BI firms have steadily increased their participation in complex, costly, and risky products under the new conduct standard and continue to rely on financial incentives that Reg BI was intended to curb.
“In short, too many Reg BI firms are still placing their financial interests ahead of their retail customers in violation of the rule’s chief directive,” according to the report. “Clearer regulatory guidance is needed to allow a course correction that would help Reg BI earn the ‘best interest’ label that it bears.”
To review the complete study done by NASAA, click here.