What to look for as Reg BI effective date nears

May 6, 2020 by Kelton Corcoran

about the author:

Kelton Corcoran

Senior content marketing specialist

Kelton Corcoran is a senior content marketing specialist at Advicent, the financial planning technology provider of choice for nearly 100,000 financial professionals.

Tuesday, May 5th not only marked the 2020 celebration of Cinco de Mayo, but it also marked exactly 11 months since the Securities and Exchange Commission officially voted in the Regulation Best Interest (Reg BI) rule. The rule, which is designed to help close the regulatory gap between broker-dealers and Registered Investment Advisors (RIAs), builds upon FINRA’s suitability rule. While broker-dealers in the past could recommend investment strategies that were simply suitable for a client, they will now need to present the very best investment option based on their client’s unique financial situation.

There are several important elements that broker-dealers should know heading into the final two months before Reg BI officially lands on June 30th, and the SEC offers a robust collection of resources so that firms are fully prepared before that date. To access these resources and the full text of the rule, check out the SEC’s Reg BI website.

Though the effective date for Reg BI looms just around the corner, you may be wondering where the rule sits following the pushback from XY Planning Network and several states, along with the COVID-19 pandemic that has fundamentally changed daily business.

Let’s break down where the rule currently stands and what to look for in the next two months.

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Who is challenging Reg BI?

Last September, attorneys general from a group of eight states including New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and the District of Columbia combined to file a suit against the SEC and chairman Jay Clayton claiming that the standards to be imposed by Reg BI are too weak to properly protect clients when compared to the fiduciary rule applying to RIAs. The following day, XY Planning Network, a member platform of more than 1,000 financial advisors founded by Michael Kitces and Alan Moore, also filed a suit against the SEC. The suits were consolidated into one on September 12, 2019, after the U.S. District Court of the Southern District of New York found that they “assert the same or substantially similar claims against the same defendants.”

On October 8, just under a month after the consolidation, the Southern District of New York dismissed the lawsuit due to a self-declared lack of subject matter jurisdiction, insisting that the case instead be taken to the U.S. Court of Appeals for the Second Circuit. The lawsuit currently remains in the hands of the Second Circuit and oral arguments have yet to be scheduled.

What impact does COVID-19 have on Reg BI?

With so much of daily life impacted by the coronavirus pandemic, it is natural to wonder if Reg BI will be delayed as a result. However, in a public statement issued on April 2, 2020, SEC chairman Jay Clayton confirmed that the June 30 date for firms to be compliant with the rule remains in effect.

Clayton did express potential leeway for firm-specific complications due to the pandemic saying “to the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guides, the firm should engage with us.’ He continued, “I expect that the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”

What to expect moving forward

Following Clayton’s statement, the involved state attorneys general and attorneys for XY Planning Network have urged the Court of Appeals for the Second Circuit to expedite oral arguments to bring clarity to the financial services industry of what to expect before the June 30 effective date. The Second Circuit did announce on March 16 that the court will remain open amid COVID-19 closings and will conduct scheduled oral arguments via teleconference. At this time, the oral arguments for this case have yet to be scheduled.

Without a ruling from the Second Circuit, broker-dealers need to ensure they are prepared to meet the new regulations come June 30. Once effective, SEC examiners begin determining whether firms have made “a good faith effort to implement the policies and procedures necessary to comply with Reg BI” according to Clayton.

Broker-dealers should have a full understanding of Reg BI and what needs to be done to ensure compliance at their firm by taking advantage of the resources provided by the SEC and FINRA. Additionally, leveraging a comprehensive financial planning tool such as NaviPlan can put broker-dealers in a better position to justify their recommendations and document compliance efforts. For more information on how broker-dealers can support best interest advice with NaviPlan, click here.

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