Answers to the SEC’s Reg BI FAQs depend on facts, circumstances

When the CFP Board provides guidance for its fiduciary standard, it uses case studies

Sometimes the answers to the Securities and Exchange Commission’s frequently asked questions on Regulation Best Interest don’t provide concrete solutions.

Last week the SEC released a set of 13 questions about Reg BI, as it’s known. The regulation is the centerpiece of a regulatory reform package the SEC passed last summer. Reg BI and a customer relationship disclosure document, Form CRS, must be implemented by June 30.

As financial firms and professionals gear up for the deadline, the SEC is providing guidance through FAQs. One on Form CRS was released in November.

Although compliance experts praise the SEC for trying to explicate the complex advice rules, they say the FAQs don’t always provide total illumination. For one thing, the answers often depend on the “facts and circumstances” of a situation.

“Some of them are helpful; some of them aren’t,” said Amy Lynch, president of FrontLine Compliance. “Where they are not helpful is where they’re hedging their language – and there’s a lot of hedging. They don’t come out and say ‘yes’ or ‘no.’”

Kurt Wolfe, a compliance attorney at Troutman Sanders, said much of the information in the Reg BI FAQ is not new.

“Some of it is helpful,” Mr. Wolfe said. “A lot of it was copied verbatim from the adopting release and was either cobbled together or repackaged to respond to a question.”

Todd Cipperman, a principal at Cipperman Compliance Services, said the Reg BI FAQs were useful but that such guidance is usually issued after a regulation is in place. The fact that it’s coming out now signals how much of a challenge Reg BI compliance will be.

“The yellow flag is you need FAQs already,” Mr. Cipperman said. “I always like the staff guidance because they’re responding to real-world questions and not just policy debates.”

For instance, he said the FAQ makes clear that Form CRS does not satisfy the disclosure requirements of Reg BI.

But Knut Rostad, president of the Institute for the Fiduciary Standard, is concerned that the reality illustrated in the SEC’s FAQs is one in which brokers themselves decide how to handle conflicts of interest.

“The FAQ adds nothing new from the Reg BI release,” Mr. Rostad said. “Brokers will write and interpret their own policies and procedures, and the SEC has said brokers are best able to determine whether mitigation [of conflicts] is needed.”

Mr. Rostad prefers the way that the Certified Financial Planner Board of Standards Inc. is providing guidance about the strengthened fiduciary duty being required of its mark holders, which also will be implemented on June 30. The CFP Board has released a document filled with case studies illustrating whether a mark holder has met his or her obligations in different scenarios, such as an insurance professional selling an annuity.

“It successfully describes the gravity of the situation and heads in a good direction to begin to address mitigating material conflicts of interest,” Mr. Rostad said.

Ms. Lynch also likes the CFP Board approach. “They’re giving you facts and circumstances in each case study, so you can do your own analysis,” she said.

But Mr. Wolfe said case studies can’t be comprehensive.

“What happens when the real-life situation you encounter deviates from the relevant CFP Board case study?” he said.

The SEC is inviting financial professionals to send their questions about Reg BI and other parts of the advice package to IABDquestions@sec.gov.

Editor’s note: This article has been updated to better reflect Mr. Rostad’s comment regarding conflicts of interest.

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