Compliance April 23, 2020

Nearly Time to Comply with Reg BI

Some see the SEC’s Regulation Best Interest as “nothing new,” while others say it will be a game changer when it takes effect June 30. Likely the biggest impacts will be felt by dual registered firms and broker/dealers.
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Art by Julie Benbassat


The reason why the U.S. Securities and Exchange Commission (SEC) decided to come out with Regulation Best Interest (Reg BI) is because the Dodd-Frank Act required a study be conducted on whether investors could tell the difference between a brokerage account and an advisory account, and, of course, they could not, says Bao Nguyen, a principal in the risk advisory department of Kaufman Rossin.

“To harmonize that, the SEC came up with Reg BI, to bring it closer in line with the fiduciary rule of the Investment Advisers Act,” Nguyen says. “They also came up with Form Customer Relationship Summary (CRS), which requires a broker/dealer [B/D] and adviser to provide a two-page summary of their investment recommendation.”

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The criteria on which Reg BI is based is built on four building blocks, says Thomas Gorman, a partner with Dorsey & Whitney.

“These are the disclosure obligation, the conflict of interest obligation, the care obligation and the compliance obligation,” Gorman says. “It is designed to ensure the broker makes reasonable efforts to put the interests of the client ahead of the firm and the individual broker.”

With the disclosure obligation, the broker must disclose all fees, Gorman says. The conflict of interest obligation requires the broker to either mitigate all conflicts or to disclose them clearly, he says. The care obligation means that the broker must explore all investment options available to meet the customer’s investment objectives.

“The broker has to do his homework,” Gorman says. “He needs to investigate all options. And the compliance obligation means he is taking care of all of these things.” Like other sources, Gorman says the compliance obligation will likely require material changes to firms’ processes and procedures.

With the regulation taking effect June 30, inspectors from the SEC’s Office of Compliance Inspections and Examinations (OCIE) will start to visit broker/dealers to see if they are compliant beginning on that date, Gorman says.

While Gorman says that Reg BI is really nothing new, just essentially the SEC repackaging existing rules, Nguyen sees it as more of a real “game changer.”

“For so many years now, the SEC only applied a ‘suitability’ principle to broker/dealer sales,” he says. “Now, broker/dealers will truly have to act in the best interest of their customers.”

To apply the four principles of Reg BI to their practices, Kaufman Rossin is advising its clients to think objectively and exhaustively about their business models.

“We are telling clients to think carefully about all of the ways they are paid,” Nguyen says. “Look at the conflicts of interest associated with your business model and do a conflict of interest inventory. You then need to do mitigation mapping—mapping specific conflicts to detailed policies, procedures or disclosures that will mitigate those conflicts.”

While it is not expressly required by Reg BI, Kaufman Rossin is encouraging its clients to keep a record of the recommendation they make as to why they think a certain investment is in a client’s best interest.

Rich Kerr, a partner at K&L Gates, says he is telling clients to make Reg BI policy part of their regular supervisory procedures. “That may mean migrating a number of procedures they already have in place to the Reg BI policy,” Kerr explains. “Very likely they will need to enhance their conflict of interest procedures.”

As for the care component of Reg BI, rather than examining product suitability over and over again for clients, K&L Gates is recommending that brokers create a “product inventory documenting the basis on which they have determined that each product is in the best interest of retail customers,” Kerr says.

Brokerages may be surprised to learn that they have contact with retail customers, he adds.

“If you asked them a year ago if they have not just institutional but also retail customers, they would have said no,” Kerr says. “Many firms have discovered that this is not, in fact, the case. So, they need to inventory each of their business lines to see if there are touch points with retail customers.”

Once they have identified the businesses that are impacted by Reg BI, brokerages will need to train all client-facing personnel on the new regulation, Kerr says. With the coronavirus keeping so many people working from home, it will be challenging to meet the June 30 deadline, he says. They will have to replace those in-person training sessions with webinars and video training, he says.

Practice Management April 20, 2020

Adviser Industry Impact of COVID-19

The coronavirus has brought a cooling of the pace of M&A, questions about remote work and concerns about what a slowdown in growth could mean for those advisory firms that have been pushing hard for scale.
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Art by Brian Stauffer


As fiduciaries to their clients, financial advisers are used to putting others’ interests first.

Indeed, advisers currently are spending a lot of time and energy helping their clients and prospects deal with the implications of the coronavirus pandemic. In addition to coaching individual investors through the unprecedented daily market swings, retirement specialist advisers are helping plan sponsors make tough choices about plan designs, especially the expansion of loan and hardship withdrawal provisions now permitted under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

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Such work is certainly building loyalty and goodwill among the client base, sources agree, but it is also important for firm leaders to step back from these efforts to take stock of how this situation is affecting their own businesses. Not only is this prudent from a client service perspective—as it helps to ensure no unexpected disruptions in service will occur—it also can help staff gain an important piece of mind during an incredibly stressful time.

Remote Work Is Now the Norm

Like many sectors of the U.S. economy, the first major impact of the COVID-19 pandemic seen in the advisory industry was a wave of cancellations of in-person meetings and events. For example, back on March 10, J.P. Morgan Asset Management chose to hold its annual Guide to Retirement release event as a digital webinar because of concerns about the potential for a COVID-19 outbreak in New York. Appropriately enough, the 2020 Guide emphasizes the increased anticipated market volatility that investors will likely face in coming years—and not just due to the pandemic.

The large advisory industry conference events soon followed, either postponing their plans or canceling them outright, and soon advisory firms themselves began to implement work-from-home policies and remote meetings for clients and prospects. One firm, Two West Advisors, has launched a virtual, private consultation service for the 30,000 retirement plan participants it serves who may have been financially impacted by the coronavirus. CEO Marko Ungashick says the service is holistic, built on technology that enables individual participants to incorporate all their finances outside of their retirement plan accounts into the discussions.

“The meetings are set appointments so our financial experts can review each individual participant’s information in advance and be prepared to have an informed conversation,” Two West President Ryan Rink says. “We want to make sure the participants and [the financial experts] understand how their other accounts are doing to ensure they’re moving in concert with one another.” The service will be available for the foreseeable future, “regardless of the impact on Two West.”

“It’s a volatile time and as long as there’s a demand for it from our customers, we’ll make it work,” Rink says.

Another firm, Chepenik Financial, directed all its employees to work from home starting March 13, says Jason Chepenik, managing partner.

“This is likely the moment we will become remote and never go back,” he says. “It wasn’t a difficult decision to make. The only difficult aspect of it is maintaining camaraderie among my team.”

Firms say they are holding staff and client meetings via Zoom, Microsoft Teams and other platforms.

As the adviser community transitions to remote-based work, cybersecurity and protecting sensitive information should be top of mind, says Cassandra Labbees, a member of the Employee Benefits and Executive Compensation Practice at law firm Epstein Becker Green. “Employees’ Wi-Fi systems to connect to the internet should be private and password protected,” she says. “Should their system go down, they should not access public Wi-Fi. Instead, they should contact their IT department for help.”

The M&A Impact

Heading into 2020, one of the big storylines expected to define the year was the fast pace of mergers and acquisitions (M&A), after last year broke deal volume records for both registered investment advisers (RIAs) and independent broker/dealers (B/Ds).

As expected, 2020 got off to a quick start. Data provided by Fidelity shows 20 RIA transactions in the first two months of the year, representing $28.7 billion in client assets and exceeding assets under management (AUM) totals for all of the first quarter of last year. As market volatility and the COVID-19 pandemic unfolded in March, M&A activity clearly slowed. By the end of the quarter, just three more RIA deals were inked, bringing the total to $29.9 billion in client assets. In the end, the quarter’s RIA deal volume was down 26% in terms of the number of transactions, but up 35% in client assets compared to the first quarter of last year.

Those figures have M&A experts contemplating what the second quarter, and indeed the full year, will bring in terms of deal volume. Michael O’Bryan, a partner in Morrison & Foerster’s mergers and acquisitions group, notes there are many transactions that are currently in the interim stages—with deals signed but mergers incomplete. He expects these deals will more or less continue as envisioned, but the negotiation and signing of new deals may slow significantly.

O’Bryan says it is unlikely that deals that are now unfolding will unravel, though they may take some additional time to receive full regulatory approval as the functions of government also slow.

“Typically, if it is a stock-for-stock merger or acquisition agreement, you may find that while both parties have been hit pretty hard by this situation, they might both have been hit relatively the same,” he explains. “And looking forward, they are both facing the same issues, and so in a stock-for-stock deal there may not be as much of an impact as you would expect.”

Cash-based deals are different, though.

“In a cash deal, you can certainly imagine the attitude of the person who is supposed to be spending the cash might be a bit different today versus two months ago,” O’Bryan speculates. “In fact, while they already were benefitting from a sellers’ market, the cash price the seller is going to receive may now seem even more attractive. On the other hand, if you are paying cash to acquire a company, you may now feel like the contracted amount is too great.”

The Client Perspective

ISS Media, the publisher of PLANADVISER, recently fielded a pulse survey on the impacts of the COVID-19 pandemic and received 387 responses from a wide range of employer sizes.

The results show that employers are pretty evenly split in terms of being “somewhat,” “moderately” or “very” concerned about the effects of the coronavirus on their organization’s ability to operate. While the percentage varied by employer size, generally less than 10% of organizations feel their organization needn’t be concerned.

Employers in the ISS Media pulse survey are also pretty evenly split on the question of how their daily operations have been affected. Roughly half say some employees are unable to work, but others are now working from home or in modified office arrangements, while a smaller but still sizable group says their daily business operations have not yet been affected directly by the pandemic.

About half of employers seem to be weighing layoffs of furloughs and enacting hiring freezes, while about a quarter are contemplating mandatory salary reductions. But even with so many emerging challenges, the ISS Media data shows, employers—at least at this stage—appear to be committed to funding their benefits programs. For example, the data shows only smaller organizations are thinking of freezing their pension plans in response to the pandemic, while around one in four plans is evaluating its safe harbor status, with larger plans more likely to be doing so. 

The data further shows many respondents have not yet taken any action related to investment options/menus, with 85% saying they have not even yet discussed that topic. Notably, 20% have discussed increasing investment oversight and due diligence activities.

At this early point, few participants have adjusted salary deferrals into retirement plans, although high levels of uncertainty exist. The same is true for participation rates—no impact is yet appreciable but that could certainly change in the near- and mid-term future.

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