The Financial Services Institute (FSI) is criticizing rule changes the North American Securities Adminstrators Association (Nasaa) wants to make about advice that advisors provide to retail investors.
In early December, FSI and other industry groups submitted comment letters stating concerns that Nasaa’s proposed revisions conflict with Regulation Best Interest (Reg BI) adopted by the Securities and Exchange Commission (SEC). The groups say the changes could make it harder for retail investors to get financial advice.
Nasaa, which represents state and provincial securities regulators in the U.S., Canada and Mexico, wants to update its Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, better known as the “Business Practices Rule.”
Nasaa maintains its proposed revisions would make its rule better conform with Reg BI and other developments in the securities industry, including the blurring of brokerage and advisory service models and the emergence of fintech and other digital investing platforms.
Among its revisions, Nasaa is proposing that a broker-dealer or agent act in the best interest of a retail customer when recommending an investment strategy or the sale or purchase of a security. That includes making all reasonable efforts to avoid or eliminate conflicts of interest and disclosing and mitigating conflicts that can’t be avoid. In addition, a broker-dealer or agent will be presumed to have placed its financial interests ahead of a retail customer if it participates in sales contests, sales quotas, bonuses, or any other non-cash compensation based on sales of securities.
FSI’s concerns
However, FSI said in its letter that Nasaa’s proposed revisions expand the definition of a “retail customer” to include all prospective retail customers, while the SEC rule takes a more nuanced approach. Under Reg BI, to be a “retail customer,” a person must actually use a broker’s recommendation for personal, family or household purposes. Nasaa’s proposal does not address whether the recommendation must be used and for what purpose it must be used, FSI said.
FSI adds the proposed rule expands the definition of “recommendation” so that it includes not only those made directly to a retail customer, but also those made through a third party. Under Reg BI, recommendations are defined only as those made directly to a retail customer, FSI says.
FSI also said Nasaa’s proposed revisions could result in broker-dealers and registered reps having to comply with different rules for annuity sales than they would under Reg BI and other national standards.
Also, Nasaa’s rule could trigger conflict with federal regulations, FSI said. Specific components of Nasaa’s proposal are misaligned with Reg BI, which could be raised in litigation if Nasaa’s rule is ever adopted by a state, FSI maintained. More important, the Nasaa proposal includes a new definition of what is “in the best interest of the retail customer” that might run contrary to fulfilling Reg BI obligations, FSI said.
The revisions also go beyond Reg BI by codifying guidance and interpretation which have a different legal force and effect than regulations, FSI says. Nasaa’s revisions use SEC guidance that is not expressly included in Reg BI, FSI maintains.
“The proposed rule is unnecessary and could cause significant unintended consequences for our members, their clients and the industry,” FSI president and CEO Dale Brown said in a press release.
FSI advocates on behalf of more than 130,000 independent financial advisors and over 80 independent financial services firms.
More opposition
The Securities Industry and Financial Markets Association (Sifma) and the American Securities Association (ASA) also submitted comment letters to Nasaa.
Nasaa’s “proposed language changes would fundamentally rewrite the existing regulatory regime, including Reg BI, under which broker-dealers provide services to investors,” wrote Sifma. “There is a growing consensus that Reg BI is increasingly well-functioning and effective in protecting investors after more than three years of closely-watched regulatory examinations, enforcement actions, and an ever-growing body of regulatory guidance.”
ASA blasted Nasaa in its comment letter. “Over the past decade, NASAA has morphed from a conference of state regulators into an activist lobbying organization that aligns itself with special interests at the expense of the actual needs of investors,” it said. “To be crystal clear, NASAA members have absolutely no authority to re-write Reg BI on their own, or to make arbitrary decisions about what aspects of Reg BI ‘matter most’ to them and could therefore justify expansive new rules.”
