The SEC has confirmed that it will not delay the compliance date of Regulation Best Interest past June 30 in light of the coronavirus pandemic. We support the Commission’s decision and think it will benefit both ordinary investors and firms.
Will Remote Work Make it More Difficult to Implement Reg BI Systems?
One reason broker/dealers hoped to delay the compliance date is that Regulation Best Interest, or Reg BI, involves adding new systems that may be more difficult to implement with many employees working from home. Some firms may be changing their investment menus, putting new models into place to support and vet recommendations, and documenting their processes. However, they’ve expressed concern that it may not be possible to implement these effectively under the current conditions.
Recognizing these concerns, the Commission has made a statement that it will focus on whether firms have made “a good faith effort to implement policies and procedures necessary to comply with Reg BI, while also providing an opportunity to work with firms on compliance and other questions.”
Because in-person meetings are also on hold during the pandemic, it may be even more important for broker/dealers to have useful website disclosures regarding conflicts of interest and an electronic Form CRS explaining their services and fees available for customers.
Broker/Dealers and Investors Should Be Aligned in Navigating Stimulus Bill Provisions
One aspect of the stimulus bill that we expect to be relevant for broker/dealers is the relief from “hardship withdrawals.” The stimulus bill, officially the CARES—Coronavirus Aid, Relief, and Economic Security—Act, allows investors to take hardship withdrawals of up to $100,000 from their 401(k) plans and IRAs.
Broker/dealers are likely to be called upon for advice about these withdrawals from IRAs. Under existing regulations, broker/dealers may earn on a transaction basis and individually benefit from the withdrawal; they may also benefit from the provisions that allow investors to repay via multiple transactions over the next three years.
However, broker/dealer compensation in this case may not necessarily align with what is beneficial for individual investors. Investors are better off not withdrawing from these accounts unless they absolutely have to. Withdrawing during a down market is particularly unfavorable, and investors will not be able to time the market to take advantage of the best market days and avoid the worst ones.
Thus, we think it’s important to implement Reg BI as planned so that the incentives for broker/dealers during this time clearly align with the incentives for investors.
Our Take on the SEC’s Middle-Ground Approach to Reg BI
We support the SEC’s decision to take a middle-ground approach. The Commission instructs firms to “continue to make good-faith efforts around operational matters to ensure compliance,” but also offers opportunities for firms to engage with them if disruptions caused by COVID-19 render them unable to fully implement the changes.
This approach grants companies relief if they are not able to have all their systems and processes in place by the compliance deadline. The Commission’s approach to focus on whether firms have made “a good faith effort” while also “providing an opportunity to work with firms on compliance,” strikes a fair balance between the needs of the investors and the firms.
While these times are challenging for broker/dealers, we believe that the protections of Reg BI are needed now more than ever in order to help investors navigate these turbulent times.