Displaying items by tag: reg bi

During recent testimony before the Senate Banking Committee, SEC Chair Gary Gensler told senators that the agency needs more resources for exams. He said the exam division’s “work is essential to ensuring strong compliance across the board,” including “work to test for compliance with Regulation Best Interest.” Gensler said the enforcement division “is doing more with less” and “more cases are being litigated and going to trial.” He also stated, “The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.” For fiscal 2021, Gensler said the SEC received 46,000 tips, complaints, and referrals from the public. This was up from about 16,000 five years earlier. For the exam division, Gensler said the division exceeded the previous year’s numbers by completing more than 3,000 exams and the fiscal 2023 budget request supports an additional 4% increase in full-time examiners.

Finsum: In recent testimony, SEC Chair Gary Gensler asked the Senate for more funding for exams, including compliance with Reg BI.

Not only did the SEC’s Regulation Best Interest (Reg BI) take effect about two years ago, since then, its had tongues wagging, according to questce.com. The topic continued to flash plenty of energy at FINRA’s recent 2022 Annual Conference.

So, what insights have been gained since Reg Bi was implanted and, to this point, what’s clicked for firms? Have any conflicts been isolated?

A few pieces:

1.) FINRA will be Conducting Deeper Reg BI Exams

FINRA wasted no time acknowledging that, down the road, it will undertake deeper reviews of Reg Bi and Form CRS.

2.) Audits Unveiled Some Good (and Bad) Behaviors

3.) Product Decision Trees Should be Documented

4.) Training/Policies Needs to go Beyond Rule Definitions

Meantime, senators recently were informed by Gary Gensler, chair of the Securities and Exchange Commission, that additional resources are required by the agency, according to thinkadvisor.com. The exam division’s “work is essential to ensuring strong compliance across the board,” including “work to test for compliance with Regulation Best Interest,” he continued.

The enforcement division’s “doing more with less,” Gensler said in testimony before the Senate Banking Committee, the site continued.

The tip line was burning in fiscal 2021, with the agency handling 46,000 tips, complaints and public referrals, the chair added. Five years earlier, that number stood at about 16,000.

According to the SEC’s draft strategic plan for the next four years, the agency plans on shifting its enforcement focus regarding Reg BI to “making a recommendation.” The SEC’s Strategic Plan for 2022-2026 states that the agency intends to bring cases that matter to “all parts of the SEC’s mission.” This includes failure to act in a retail customer’s best interests when making a recommendation, among other items. Kurt Gottschall, a partner in Haynes Boone, and a former director of the SEC’s Denver Regional Office told ThinkAdvisor that the language “indicates the SEC is ready to move beyond basic compliance and disclosure obligations to scrutinize the placement of retail investors’ funds in advisory versus brokerage accounts, whether complex or risky products were offered to those investors, and registered representatives’ consideration of costs.”

Finsum:Based on the language in the SEC’s four-year strategic plan, advisors and Broker-dealers will need to pay more attention to compensation arrangements and product placements.

Single security ETF launches have been all the rage this summer, but regulators are now sounding the alarm. Broker-dealers that sell single-stock ETFs in Massachusetts are being investigated by regulators according to Massachusetts Secretary of States William F. Galvin. Galvin has directed his Securities Division to investigate Mass-based registered broker-dealers that sell single stock ETFs to retail investors. He believes that the leverage used to magnify gains and losses in single stocks is not suitable for "Main Street" investors. This follows a statement by SEC Commissioner Caroline Crenshaw earlier in the summer in which she stated that the approval of single-stock ETFs posed a “greater risk” for investors than index-based leveraged and inverse ETFs. She also stated it would be difficult for advisors to recommend these products while meeting their Reg BI obligations.

Finsum:Regulators are sounding the alarm on single-stock ETFs, indicating that advisors may be in breach of Reg BI for recommending them.

Western International Securities Inc., which is the first broker-dealer to be sued by the SEC for alleged violations of its Regulation Best-Interest fiduciary rule, is expected to spend at least $1 million on its defense. The broker-dealer is accused of failing to meet its fiduciary obligations by selling $13.3 million in high-risk, unrated junk bonds that were not in the best interest of retirees and other risk-averse retail customers. Western said it plans to “actively defend” itself against the SEC’s allegations. Brian Rubin, a partner at Eversheds Sutherland LLP, estimated that Western’s legal fees will cost anywhere from several hundred thousand dollars to well over $1 million. He believes that it’s likely that the SEC demanded too much to settle due to it being its first Reg BI enforcement case. Since the conduct took place after the effective date of Reg BI in June 2020, the SEC brought the charges under Reg BI as opposed to its predecessor suitability standard. 

Finsum: Western International Securities is expected to spend at least $1 million on attorney fees as it fights the first Reg BI lawsuit.