The Securities and Exchange Commission will provide guidance to financial firms later this month on what the agency will expect from them in terms of compliance with its new investment-advice rules.
The SEC soon will release risk alerts on Regulation Best Interest, the new broker-dealer advice standard, and on Form CRS, the client relationship summary that is also part of the regulatory package the agency approved last summer.
Reg BI, as it’s known, must be implemented by firms by June 30. That’s also when firms will have to start using Form CRS, a document that is supposed to help customers choose whether to work with a broker, an investment adviser or a dually registered financial professional.
The risk alerts will outline how the SEC will approach examinations for compliance with Reg BI and Form CRS and also will include sample requests of the kinds of documents the SEC will seek, said Peter Driscoll, director of the SEC Office of Compliance Inspections and Examinations.
“The most important thing is that we get it right,” Mr. Driscoll said at an Investment Adviser Association conference in Washington Friday. “So we want to do what we can to help with that implementation.”
As of July 1, the SEC will focus its Reg BI probes on whether a financial firm has implemented policies and procedures to comply with Reg BI, which prohibits brokers from putting their financial interests ahead of their clients’ interests. The SEC has touted Reg BI as a step up from the current suitability rule that governs brokers.
“The goal here is to have a successful implementation,” Mr. Driscoll told reporters on the sidelines of the IAA conference.
Early next year, the SEC will turn its focus to whether brokers are acting in their clients’ best interests when making investment and trading recommendations, Mr. Driscoll said.
Implementing Reg BI and other parts of the regulatory package is a heavy compliance undertaking for many brokers and investment advisers. Mr. Driscoll encouraged them to contact the SEC with questions about the new regulation by using the address [email protected].
“We meet weekly on it and try to solve some of the questions that people have,” Mr. Driscoll said.
Does ESG live up to hype?
Another area that the SEC exam program will emphasize this year is reviewing funds that purport to follow environmental, social and governance principles in investing. The so-called ESG movement has been gaining momentum over the last few years.
The SEC wants to make sure ESG funds are giving investors what they are promising.
“We’re worried about if someone claims they’re ESG, are they really ESG?” Mr. Driscoll said. “Are they taking the S&P and pulling out three or four securities and then branding themselves ESG investment style or manager?”
Enforcement zeros in on fee conflicts
The SEC’s Division of Enforcement is focusing this year on conflicts of interest surrounding fees in mutual funds, unit investment trusts, cash sweeps and revenue sharing.
“If you project over the next year or so, I expect to see enforcement recommendations and hopefully cases also in all of those spaces,” Steven Peikin, SEC Enforcement co-director, told the IAA audience.
The crackdown on fee conflicts has been illustrated in recent years by the SEC’s so-called share class initiative. Under that self-reporting program, the SEC has targeted financial advisers’ failures to disclose to clients that they recommended mutual funds with 12b-1 fees when lower-cost shares were available in the same class.
The SEC has received much criticism from the financial industry that it engaged in “regulation by enforcement” in the share-class effort because it wasn’t clear about what it expected with regard to 12b-1 fees.
The firms that most often had problems were those that were dually registered and took those fees on their brokerage side. The advisory side was operating under fiduciary duty.
Mr. Peikin said that fiduciaries should understand that not disclosing that they were recommending high-fee products and pocketing some of the higher price must at least be disclosed.
“That’s not wild-eyed enforcement run amok,” he said.
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