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Here’s How Much Time, Resources and Money Complying with Reg BI Could Cost Broker-Dealers

By Mrinalini Krishna June 7, 2019

Broker-dealer firms have been going through the hundreds of pages that make up the SEC’s Regulation Best Interest package, partly to assess the impact the new rules will have on their firms and what they need to do to comply.

Mark Quinn, director for regulatory affairs at Cetera Financial, shares with FA-IQ the enormity of the compliance requirements and the time, resources and costs that broker-dealer firms may need to bear.

FA-IQ: What do you make of the rules that were approved, including some of the new proposals like the extension of Reg BI to account recommendations?

Quinn: I would say at the 10,000-foot level, it was pretty much what we expected. There weren’t any real radical departures from what was proposed originally. The account opening and IRA rollover provisions were not really a surprise. There are a lot of people that suggested these are big departures from the existing standard. I’m not sure that’s true because, for one thing, Finra has always taken the position that account-type recommendations are an aspect of the broker-dealer suitability rule.

FA-IQ: Do these regulations imply an additional compliance burden? And to what extent?

Quinn: We’re about maybe 100 pages into the 800 pages of material side [as of Thursday morning], and I’ll give you that caveat up front. I think the two big areas that are going to cause compliance burdens and efforts are conflict identification and mitigation because now there’s an explicit requirement for both broker-dealers and RIAs to identify all of and disclose all of your relevant conflicts, but also to mitigate them or eliminate them.

I think firms are going to have to spend a lot of time looking at what their revenue sources are, what their compensation arrangements are, what causes conflict, and can those conflicts be dealt with purely through disclosure or are they going to have to be mitigated or perhaps even eliminated.

The other one that’s going to be a little bit of perhaps a surprise is when people start looking at the logistics of delivery of the Form CRS. Cetera has north of a million existing customer accounts, and in the current version of the rules, we have to send a Form CRS to all those legacy customers, I think by 60 days after the rules become effective next summer. Sending a million of anything is quite a daunting exercise. Obviously, we’ll figure it out and we do have some time.

Mark Quinn

FA-IQ: What kind of investments did you make in trying to be compliant with the DOL rule? And what kind of additional costs are you looking at to be compliant with Reg BI?

Quinn: I don’t know the exact dollar figure that we spent directly related to DOL components, but it was well into the seven figures. It was an all-hands-on-deck kind of effort. We had a group of probably 30 or 40 people engaged substantially full-time on this at Cetera, not counting direct costs of outside counsel and consultants and everybody else.

I think that the ongoing compliance expenses from Reg BI will be lower than that because, for example, you don’t have best interest contract exemptions and forms to get signed and monitor the way that you would have under the DOL rule. But make no mistake, all of this conflict identification and mitigation and disclosure will take a lot of time and effort. I think delivery of forms, like Form CRS, and updating your conflict disclosures on whatever form you use … all of that can be substantial, really hard to quantify at this point. And again, it won’t be as bad or as draconian as the DOL rule, but it’ll be substantial.

FA-IQ: Do you think the June 30, 2020 timeline for Reg BI is an achievable time for firms to be fully compliant with the proposals?

Quinn: Well, it’s a little early to say, but I will say that things are much more complicated. That’s a long way of saying a year sounds like a long time, but it may not be. I do think Commissioner [Hester] Peirce made some very helpful and constructive comments about being sensitive to it being an aggressive timeframe and that if there were issues that were unforeseen, the industry should come back and talk about extensions of time.

FA-IQ: The rules don’t clearly define parameters that will be looked at to judge whether investment advice is in the clients’ best interest. Do you think the lack of prescribed factors is something that firms or advisors could potentially have trouble with, litigation-wise, going forward?

Quinn: We’re coming from an environment where the suitability standard basically says you have to take the entire client circumstances into account. No one thing is more important than the other. I think what was very good about what the SEC did was they said, ‘Yes, cost is important, and, in some circumstances, it may be the largest single factor, but it’s not the only one.’ I think what people were afraid of was that whatever standard got developed would say it has to be the lowest-cost alternative.

But I will say, and this is just sort of my own opinion and may not be shared by anybody, I think what you will see, especially in arbitration is that claimants’ lawyers will use the term best interest as sort of symbolic of something that maybe isn’t. In other words, I can see an opening statement of a claimant’s lawyer saying this rule says they’re supposed to act in my client’s best interest, and he lost a lot of money, and therefore it’s clear that they did not. I don’t know that it meaningfully changes potential litigation exposure. I do think it was good that the SEC said in the release – and the chairman spoke about it yesterday [Wednesday] – that it was not their intention to create new private rights of action by doing this.

FA-IQ: Now that the SEC has come up with Reg BI, and states are working on their own fiduciary rules. Does Reg BI preeempt state rules? Will the states back down? How do you see this playing out?

Quinn: The [SEC] chairman was pretty clear. Several commenters and several others had asked the SEC to say definitively in Reg BI or in the release that it was intended to preempt state regulation; the SEC has not chosen to go there.

I think what [the SEC chairman] said, at least the way I interpreted it, is he’s saying to states ‘Please try to act consistently with what we’ve done.’ But at the end of the day, they didn’t express a view on whether or not Regulation Best Interest preempted state laws.

My prediction is several states will go forward, and New Jersey and Nevada are already a long way down that track – New Jersey in particular.

My guess is we see more of this in states rather than less. I don’t think Regulation Best Interest really calmed the states much. And if you read the release of the New Jersey regulations, they specifically say ‘We don’t think Regulation Best Interest goes far enough and we’re going forward, because we think we need to.’

This interview has been edited for clarity and brevity.