Calls on Congress to Fully Fund Reg BI Implementation

An open letter to two U.S. Senators emphasizes that the SEC must receive sufficient fiscal support to effectively oversee the industry’s ongoing implementation of Regulation Best Interest and Form CRS.

On Monday, the Insured Retirement Institute published an open letter addressed to U.S. Senators Chris Van Hollen, D-Maryland, and Cindy Hyde-Smith, R-Mississippi, who are the chair and ranking member, respectively, of the Subcommittee on Financial Services and General Government of the Senate Appropriations Committee.

The letter, signed by IRI President and CEO Wayne Chopus, urges Congress to provide sufficient funding for the Securities and Exchange Commission to effectively oversee the industry’s ongoing implementation of, and compliance with, Regulation Best Interest and the related Customer Relationship Summary disclosure, known as “Form CRS.” The publication of the letter coincides with the Senate subcommittee’s consideration of the SEC’s fiscal year 2023 budget.

In past interviews, Chopus has emphasized that the IRI supports both regulations, which require broker/dealers and their registered representatives to always act in their clients’ best interest without putting their own interests ahead of their clients. As Chopus has noted, the rules also ensure that investors have the information they need to make informed decisions when choosing a financial professional and whether to follow investment advice from their chosen adviser.

“We believe it is critical for Congress to provide adequate funding to ensure that the SEC’s examinations and enforcement programs can effectively oversee the industry’s ongoing implementation of and compliance with Regulation Best Interest and Form CRS,” Chopus wrote in the new letter. “IRI has long supported the principle that financial professionals should be required to act in their clients’ best interest when providing personalized investment advice, and we were proud to support the adoption of Reg BI and Form CRS, which were finalized in mid-2019 and took effect in mid-2020.”

As Chopus wrote, Reg BI is part of a “cohesive and workable framework” of federal and state rules—including the U.S. Department of Labor’s rules for providers of investment advice and the latest iteration of the National Association of Insurance Commissioners’ model rule on annuity sales practices—that effectively protect investors against bad actors without depriving them of access to the wide range of products and services they need to help them achieve their financial goals.

“SEC Chairman Gary Gensler has been emphatic in expressing his commitment to ensuring that these rules have the intended impact on investor protection,” Chopus wrote. “During a hearing of the House Financial Services Committee, Chairman Gensler reiterated that he is working with Commission staff to ensure that Regulation Best Interest ‘lives up to what is in it, written down on the page’—that investors are getting best interest service when a broker is making a recommendation. IRI fully supports Chairman Gensler’s objective.”

“With this in mind, IRI respectfully encourages you to provide funding so that the SEC has sufficient staffing and resources to carry out its important work on Reg BI and Form CRS,” the letter states. “As you consider legislation to provide FY2023 funding to the SEC, IRI welcomes the opportunity to work with you and your staffs to advance the bill.”

As detailed in the SEC’s Fiscal Year 2023 Congressional Budget Justification and Annual Performance Plan report, the SEC is seeking $2.15 billion in operating funding. The regulator is also seeking some $57 million in separate, one-time funding to support its acquisition of a new lease for its headquarters in Washington, D.C.

The report calls on Congress to adopt the following funding language in its budget legislation: “For necessary expenses for the Securities and Exchange Commission, including services as authorized by 5 U.S.C. 3109, the rental of space (to include multiple year leases) in the District of Columbia and elsewhere, and not to exceed $3,500 for official reception and representation expenses; $2,149,000,000, to remain available until expended; of which not less than $18,979,000 shall be for the Office of Inspector General; of which not to exceed $275,000 shall be available for a permanent secretariat for the International Organization of Securities Commissions; and of which not to exceed $100,000 shall be available for expenses for consultations and meetings hosted by the Commission with foreign governmental and other regulatory officials, members of their delegations and staffs to exchange views concerning securities matters.”

Given the SEC’s wide mandate and critical mission, many stakeholders view it as substantially underfunded. For example, the advocacy section of the CFA Institute’s website points out that the Dodd-Frank Wall Street Reform and Consumer Protection Act added to the SEC’s budgetary burdens by mandating new responsibilities for the oversight of advisers to private equity funds (including registration of hedge fund advisers), the creation of a new Bureau of Credit Ratings, oversight of security-based swaps, the creation of a whistleblower program and registration of municipal securities advisers.

“Self-funding was proposed for, but ultimately stricken from, the Dodd-Frank Act,” says the CFA Institute site. “And significant problems in the overall budget of the United States have reduced even further the willingness of Congress to fund the SEC’s funding request to the level requested. CFA Institute believes that the lack of adequate resources available to the SEC contributed to its inability to more aggressively police the financial markets in recent years. We support full funding for the SEC to help alleviate market integrity problems, continue a robust enforcement program, and significantly increase the number of investment adviser examinations conducted.”

Notably, publication of the IRI letter comes several weeks after the SEC made its first formal enforcement action under Reg BI, when it charged Western International Securities and five of its brokers with violating the regulations. The charges stem from allegations that the firm recommended and sold unrated, high-risk debt securities known as L bonds to retirees and other retail investors.

The SEC alleges that the firm’s brokers sold these bonds to retail customers who were on fixed incomes and had moderate risk tolerances. They allegedly did this for the financial gain of the firm, despite the fact that the investment issuer, GWG Holdings Inc., stated that L bonds were high-risk, illiquid and only suitable for customers with substantial financial resources. In a statement to PLANADVISER, Western International Securities said it believes it complied with applicable laws and regulations, and that it intends to actively defend itself against the claims asserted by the SEC.