SIFMA Survey Highlights Industry’s Regulation Best Interest Implementation Efforts

Regulation Best Interest – finalized by the Securities and Exchange Commission last year and fully enforceable in June– significantly and meaningfully upgrades the existing regulatory regime for broker-dealers, and directly enhances investor protection. SIFMA has long supported the creation of such a standard.

Last week, to help support implementation efforts across the industry, we released a bench-marking survey of members. Overall, the survey findings – released in partnership with Deloitte – are consistent with and build upon the SEC’s own analysis of the impact of the rule on business and compliance operations.

The industry’s compliance response to the new rule illustrates the strength of the new standard. The survey found that as a result of the regulation, firms are changing their business models, prioritizing the management of conflicts of interest, strengthening their compliance systems and procedures, and investing significant resources to prepare for the rule’s implementation. The rule preserves access and choice for investors while providing meaningful protections, evidenced by the industry’s significant compliance undertaking.

Key Survey Highlights:

Business model changes are fundamental in nature.

  • Factors such as parent structure, size, platform architecture, product shelf, and financial advisor compensation influence changes to business models and operations. The top three business model changes ranked by survey participants include changes to commissions and/or fee schedules, changes to financial advisor compensation and incentive programs, and rationalization of product and/or product types on the product shelf. These changes could permanently impact the choices available to retail customers at these firms.

Conflicts of interest are a high priority focus area.

  • Business model shifts such as eliminating certain products and services available to retail customers and eliminating or changing third party revenue sources will mean prioritizing the identification, management/mitigation, and disclosure of conflicts. While policies, procedures, controls and a conflicts registry were ranked as an essential element of a robust framework, more than 50% of survey participants agreed they would eliminate certain conflicts. Additionally, 69% of survey participants said they would enhance their existing conflicts registry.

Preparation includes evaluating and strengthening the compliance framework.

  • Developing and delivering targeted training programs is crucial to successful change management and facilitating salesforce and support staff readiness. Irrespective of firm size or platform architecture, pre-compliance date testing and enhancing technology solutions to support evidence-based compliance as well as to detect potential Reg BI rule package violations have been ranked as top of mind changes by 42%, 75% and 60% of survey participants, respectively.

Operationalizing Reg BI obligations is challenging.

  • The principles-based nature of the various components of the Reg BI rule package requires significant implementation effort.
  • For example, the development and delivery of Form CRS has been ranked as the most challenging to implement by 79% of the total participant population, specifically, 56% of large firms, 61% of medium firms, and 33% of small firms.
  • Additionally, the Care Obligation, specifically, evidencing best interest rationale for certain recommendation types, and the Disclosure Obligation were ranked as posing the most implementation challenge by 77% and 72% of survey participants, respectively.

Confidence in meeting the compliance date is high.

  • 77% of survey participants expressed a moderate to high-level of confidence in meeting the compliance date, while 83% of survey participants expressed a moderate to high-level of confidence in being able to sustain compliance with the requirements of the Reg BI rule package after June 30, 2020.

Compliance requires significant up-front investments.

  • Approximately $114 million across 20 survey participants has been allocated to readiness efforts. Evidencing compliance with Reg BI requires significant investments in enabling technology, as firms seek to provide the necessary tools and applications to their salesforce and support staff. Technology costs were estimated at over $61 million. In addition, many firms are reallocating the resources of their existing staff towards readiness efforts.