Sifma admits broker-dealer firms will pay a high price for Regulation Best Interest compliance, but says it will be worth the outlay.
“The cost of implementation is going to be high. But at the end of the day, we do think it’s going to be worth it, given how we’ve positioned it in terms of just establishing that consistency in terms of how we serve clients and [having] a uniformity there,” James Allen, the recent chairman of Sifma and chairman emeritus of the group for 2020, said Tuesday at the Sifma Annual Meeting in Washington, D.C.
Allen, who is also the chairman and CEO of broker-dealer firm Hilliard Lyons, said “a lot of work is being done in preparation” for Reg BI.
Reg BI requires brokers to comply with the best interest standard when making a recommendation of any transaction or investment strategy involving securities to a retail customer.
The SEC set June 30, 2020 as the compliance deadline for the implementation of the rule, which the regulator believes gives “sufficient time” for firms to comply with the requirements.
Sifma had pushed the SEC for a conduct standard for broker-dealer firms that would not require them to act as fiduciaries, and it supports the impending Reg BI.
“Reg BI is arguably the most significant enhancement of conduct standards since the Securities Exchange Act of 1934. So, this is really significant and really does solidify … the way in which we engage our clients and to make that uniform and consistent,” Allen said.
Finra CEO and President Robert Cook said at a conference last week that complying with Reg BI will be “a heavy lift, something that the firms need to be spending a lot of resources on, obviously depending on the size of the firm and where they are in their management of conflicts.”
Last month, Sifma released what Allen described as a “very thorough and in-depth” 88-page guide to implementing Reg BI and complying with the required Customer Relationship Summary or Form CRS.
In that guide, prepared by Deloitte for Sifma, the consulting firm says several factors come into play when estimating the cost of complying with Reg BI and they vary depending on the firm’s “business model and organizational readiness.”
“Firms may want to consider undergoing a formal budget review process for Reg BI program implementation. Such a review could include considerations of both front-end and ongoing implementation costs as well as opportunities to consolidate or converge collective business efforts (e.g., technology enhancements or process automation) to maximize cost reduction potential,” Deloitte said in the guide.
Expect to pay millions to set up for Reg BI
Deloitte said it would be useful for firms to benchmark the cost of complying with Reg BI to what they spent to prepare for the Department of Labor’s fiduciary rule for all retirement advisors, including those at broker-dealer firms, before it was quashed in appeals court.
The consulting firm laid out the average start-up spending per financial institution for the DOL rule — $54.64 million for large firms (with more than $1 billion in net capital), $16.37 million for medium firms (with $50 million to $1 billion in net capital) and $2.3 billion for small firms (with less than $50 million in net capital).
The consulting firm also estimated the ongoing cost per financial institution for the DOL rule would have been $5.89 million for large firms, $3.15 million for medium firms and $1.1 million for small firms.
Also at the Sifma conference, SEC Chairman Jay Clayton encouraged the audience to engage with the regulator if they had any questions about complying with Reg BI.
He also said the SEC would like to know if Reg BI has done enough to preserve investor choice.
The SEC has repeatedly said Reg BI brings the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access — in terms of choice and cost — to a variety of investment services and products.
Not everyone is happy with Reg BI. Seven states — New York, California, Connecticut, Delaware, Maine, New Mexico and Oregon — and the District have filed a complaint for declaratory and injunctive relief against the SEC and Clayton in New York.
Such legal action is disruptive to the broker-dealer industry, lawyers who anticipated the legal challenge have told FA-IQ.
On the sidelines of the conference, Clayton was asked if he was concerned about lawsuits against Reg BI and whether he thinks they could potentially delay the implementation of the new rule.
“I’m not concerned,” Clayton said. “There’s not much I can say. There is pending litigation.”