Brokerages make progress, but still fall short on Reg BI compliance: State regulators

investmentnews.com:

Brokerages are doing a better job of complying with Regulation Best Interest but they have more work to do before they get it right, state securities regulators said Tuesday.

Under Reg BI, the broker standard of conduct implemented in 2020 by the Securities and Exchange Commission, brokers are prohibited from putting their revenue interests ahead of their customers’ interests in investment returns.

The latest iteration of a Reg BI study by the North American Securities Administrators Association shows brokers are enhancing their policies and procedures to meet Reg BI obligations but they’re also falling short on key aspects of compliance, such as offering customers reasonably available alternatives to recommendations and mitigating conflicts of interest.

Brokers selling complex products — leveraged and inverse exchange-traded funds, nontraded real estate investment trusts, private placements and variable annuities — are imposing restrictions based on the age, net worth and risk profiles of customers, the NASAA study said. They’re also using tools to compare the costs of those investments with reasonably available alternatives.

But brokers are still giving incentives to their registered representatives to sell complex products and not putting in place measures to curb potential conflicts of interest, the NASAA study found. Firms also are ignoring lower-cost and lower-risk investments when recommending complex products.

Brokers have put time and energy into disclosures contained in their customer relationship summaries, or Form CRS, but they have not enhanced point-of-sale disclosures, NASAA found.

The state regulators released their most recent conclusions — known as Phase II (b) — of their Reg BI study. The first two