Reg BI - It's A Bigger Deal Than You Might Think

(Recorded October 3, 2019) Reg BI is a bigger deal than you might think, and the implementation deadline is only 9 months away. This episode presents an overview of the four Obligations of Reg BI and what firms need to be doing.  Reg BI will affect many, many aspects of a firm's policies and operations, from marketing and advertising to compensation, recommendations and communications, to name a few.

In this episode our experts provide an update on what regulators and industry members are saying, and touches on the complexity of Form CRS. 

  

CRC-Oyster: Compliance Risk Concepts / Oyster Consulting

Transcript

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Music 0:06

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Oyster 0:06

Welcome to this week's serving of Oyster Stew, a mix of financial services, commentary and insights . Each week we will discuss what is happening in the industry based on what we see as we work with regulators and clients. We hope you come away with the knowledge and tools to help you make the best decisions for your firm's future. You can learn more about oyster consulting and the value we can add to your firm by going to our website, www.oysterllc.com

Buddy Doyle 0:33

Hi everybody. This is Buddy Doyle with Oyster Consulting. I'm joined today by Patrick Dennis our General Counsel and Polly Cordle, who runs the Oyster Solutions practice area for the firm. This is the first of a five part series of podcasts on Reg BI. It's been four months since the SEC announced Reg BI, and we're nine months away from the time firms need to implement their Reg BI programs. June 30th is the date. So hopefully everybody's been looking at it and starting to get ready for it. But, just to help you kind of think through the things that you need to do, Patrick, maybe you can tell us a little bit about what firms do need to do to be ready.

Patrick Dennis 1:19

So Reg BI really requires four obligations on the part of broker dealers. I think you need to really read through the rule, look at it and understand it. The first one is the Disclosure Obligation, which requires the firm to, with respect to retail customers, disclose all of their potential conflicts of interest. This is a little bit complicated because it means you need to then examine all of your vendors, all of your relationships and everything that could potentially be a conflict, and either disclose that conflict, mitigate that conflict or eliminate it. So those things need to be done, and it's a little bit more complicated than I think a lot of folks initially thought when they heard about this. It takes some time and effort to figure out what the conflicts are, who you have conflicts with, what needs to be disclosed, how you mitigate or how you eliminate various conflicts. The second obligation is the Care Obligation, and that essentially requires you to review and enhance all of your policies and procedures to ensure that all of your offerings, your products, all of those things are appropriate for your clients - appropriate not only for the clients in general, but also for the specific client. The third obligation is the Conflicts of Interest Obligation. And, this again requires you to make sure you have an inventory of all your conflicts, have disclosed them, eliminated them or mitigated them. It's a complicated and difficult situation to make sure that you've really examined thoroughly all of the things that affect your firm and its potential clients. It also requires you to disclose all of the fees that you're charging, how you're earning those fees and other things that you're going to need to do with that. The last obligation is the Compliance Obligation, and what that requires you to do is specifically have policies and procedures as to how you are in fact going to meet the obligations under Reg BI. In a nutshell, there's a lot of , as we say, devil in the details in connection with all four of those obligations.

Buddy Doyle 3:53

All right , thank you. So Polly is the practice lead for Oyster Solutions. What changes are coming to Oyster's software platform ?

Polly 3:59

So we're pretty excited about what we're doing in the Solutions software. We're aligning our changes in the software with the four obligations of the rule, the first being the Disclosure Obligation. We are touching on the disclosures that will mitigate the conflicts and the relationships in the firms that we have on our platform. We're doing that through a dashboard that we've built out for conflicts, specifically. We have a huge survey to help firms identify their conflicts and then build those out into a dashboard that w ill compare the conflict to their mitigation, and let them know where t heir conflict may be out of line with their mitigating process or procedure. Then to the Care Obligation, we're g oing t o help them address anything that may be out of alignment from a Best Interest transaction perspective. And, w e'll also have due diligence workflows in the system that will help them review their product platforms and make sure that those are in alignment with client care. To go back to the Conflict of Interest Obligation, the conflict survey that we've built out and inventory will help them identify every conflict (we hope) that's out there. We've built a baseline, and then we would obviously customize that. One of our big features is customization, so we would customize that for each firm to make sure that we're addressing everything that is particular to that firm. And then finally to the Compliance Obligation: we would, especially in the implementation for any firm, do a very thorough review of their policies and procedures for all of our clients. We'll be aligning their policies and procedures by helping them to recognize policies that may be affected by the new regulations.

Buddy Doyle 5:41

Great - and to me it seems like, with Reg BI BI standing for "best interest," which is a rule that governs how broker dealers deal with their retail client base, it really should lead to a fundamental change in the suitability standard, which is FINRA's primary rule around helping retail customers and making recommendations to customers. But aside from a regulatory notice in August, which you know, took a little while to get out, FINRA hasn't given firms any real guidance on their websites. But I know they've been out talking at conferences and Patrick, you're out talking to regulators on a pretty routine basis. What are they saying and when can the industry expect to hear more?

Patrick Dennis 6:33

Well, a couple of things. I've been to four or five conferences since the rule was announced in April, and it has been a hot topic. It has been at every single conference regardless of whether it's the FINRA Annual Conference I attended in May, or a couple of the regional SIFMA Compliance and Legal conferences I've been to. Reg BI has been a hot topic. It's been on every agenda. One of the things I will tell you that's going on is a lot of folks are thinking, "Oh, they're going to have to give an extension. They're going to have to give us more time." You know, I think that's what a lot of folks would like, but so far we're not hearing anything about that. And so June 30th of next year is the deadline. The Commissioner from the SEC spoke at a conference I was at earlier this week, and I don't think s he's has any inkling or any suggestions that there's going to be an extension. So I think the timing is coming. The other thing is, the things that I'm hearing at conferences other than the concern about how long this is going to take and everything else is, is Commissioner Pierce and others have let folks know that there's a lot more to this. This is not something you're going to be able to dash off in a couple of hours or a couple of weeks' worth of work. I know a number of firms that are starting on it now and have devoted a lot of time, effort, and resources to making sure they're ready because it is a lot of work. One of the things I failed to mention when we went through the obligations is the Form CRS, or Customer Relationship Summary. It requires you as a broker dealer to distill all this down into plain English and describe it all in two pages or, if you're a dual registrant with a registered investment advisor, four pages. Either way, it doesn't give you a lot of space and a lot of time to get all of the information in that you need to have in that Form. So it's going to take a lot of time and effort, to come up with a concise, cogent, well-written piece that you're going to need to deliver to your clients. So those are the kinds of things that I'm hearing in the conferences, but it is a hot topic. It is something that's on everybody's mind. It is the leader on the agenda for nearly all of the conferences that I've been to or planning on going to. So keep that in mind as this is not something that's going to be able to be taken care of with a minimal amount of effort.

Buddy Doyle 9:26

And we're expecting to hear more out of FINRA. They have some conferences coming up. For those of you who are interested in this, on October 3rd the FINRA Midwest Region Member Forum is taking place in st Louis. There's actually a FINRA Small Firm Report on Reg BI coming out. It's targeted for October 8th. The FINRA Small Firm Conference is taking place later in October on the 23rd and 24th in Santa Monica, California. And then I suspect they'll be talking about this at the Advertising Review Conference as well in Washington DC on the 24th and 25th.

Patrick Dennis 10:08

The advertising review conference has gotten a lot of press in the new advertising rules and I would categorize it as modernizing the advertising rules to fit in with social media. That is getting a lot of attention at the conferences that I'm attending as well. SIFMA is having Compliance and Legal regional conferences. And if I have this right, I think there is one coming up in Minneapolis. Certainly New York city is another one and there's a third one, which I'm forgetting where it is right now. I believe maybe it's Denver, but in any event, take a look at the website and you can find out. I'm sure Reg BI is going to be a topic at all of those conferences. So Buddy, why is this a bigger deal than most firms think, other than as I mentioned, it's more complicated than I think meets the eye.

Buddy Doyle 11:10

Well, when I look at the rule , I see this has tentacles into every corner of a broker dealer, from changing titles on business cards, to how you disclose forgivable loans and things like that. When you're recruiting reps, when you're prospecting clients and opening accounts, you kind of have to look at how you do that and what you disclose, and when. When you're recommending investments, again, what's going to happen with suitability, what's going to happen with product reviews, your advertising your marketing. Disclosures are certainly going to have to change. But one of the things that I look at when we're talking about the urgency around making a change around Reg BI, or at least some decisions around Reg BI, is this can impact comp plans. And this is a rule that's g oing t o get implemented at the end of June. But most people change their comp plans on an annual calendar basis, which means by December 31st they're defining what they're going to do as far as the compensation plan. That usually lasts all year long. And so, anytime you're touching compensation, it's a pretty touchy subject. You want to communicate that well. You want to be very thoughtful about it. So when you talk about the fact that you're serving retail customers, you're changing comp plans, you're changing processes, you're changing procedures, you're analyzing every conflict along the way. You know you're going to have to change business cards and stationary and things like that because calling someone a financial advisor who is a registered rep of a broker dealer doesn't work anymore. There's a lot of changes coming and I don't think people have really thought all the way through just how impactful this can be. It goes to the core of what you do as a broker dealer if you're serving retail customers. I think that's why this is a bigger deal than firms are thinking. When I talk to Chief Compliance Officers and ask them what they're doing on this, they often talk about, well, States are suing and things are going on and we're waiting . But I look at this and think, wow, there's going to be a time where you're going to wish you were working on your ADV at the end of March. And instead, this is going to be flooding you right at that time. So don't forget you have a day job, you have things that you have to get done. But in particular, you should be talking to your finance group right now - today - about comp plan changes that may be coming.

Patrick Dennis 14:06

Right. One of the other things that's coming out of the conferences is of course we now know that seven states and the District of Columbia have filed suit. That doesn't seem to be delaying things, and it doesn't seem to be holding it off. The other thing that's being discussed that is certainly something that folks need to keep in mind is, the states are passing legislation. Quite frankly, I think you can interpret that as the states don't believe that Reg BI goes far enough in terms of making brokers a fiduciary, and they're not particularly happy about the fact that the SEC did not put in a fiduciary standard for brokerage firms. So, we'll see where those all go. But you know, that's an aspect of where this is all going and things you need to keep in mind. So Buddy, why do you think it would be helpful for firms to consider having a third party help them implement the changes that are required by Reg BI?

Buddy Doyle 15:05

Well, so don't take this the wrong way, but there's an old analogy that when you move in next to the pig farm, sooner or later you get used to the smell. And so, sorry, you can laugh. That's okay. Every once in a while compliance can have a little bit of fun. But in reality, conflicts can be hard to sniff out, right? When you're in the bubble and you're working with the broker dealer and you're looking at at things, and I live in a rural area, so this applies more to me than most, but I will say when you're thinking about how you look at the world from your own perspective and from where you are, it can be very difficult to find a conflict, even when somebody else can see it. We've had conversations with firms before where we're talking to someone about a real conflict of interest and they just don't see it because they know they're good people. They know they're going to take care of their clients. The standard of Care Obligation, you probably already feel like you're fulfilling the standard of care to your customers because you care about them , you take care of them and you talked to them in the tough times, you talk to them during the good times. But it's really hard to look at a conflict the way a regulator would when you're looking at yourself. When I look at myself in the mirror, I see, you know, the old man, right? The me that I'm used to seeing. When other people look at me that have never met me before, they see exactly what I am. So that's a component that only an independent person can come in, look at a conflict and say, "I fully see it." And you may not be able to because you're wired to take care of your customers. And the other thing is in working with third parties, I used to work at a firm that had a lot of different businesses and it was a pretty complex structure. There was an independent rep component, there was a retail component, there was an online, a discount component. There was a bank channel to deliver services to folks going into the retail bank system. There was clearing, back office provider for a hundred different broker dealers. And you know, when I was in there I got to learn a lot. I got to see a lot, but working with 400 firms, 500 firms and being able to sort of see what happens from other people's perspectives as well. There's something that you can get working with the third party that you really can't get when you're inside your own organization and thinking about it. It's really hard to think out of the box. And in reality there is no box. So I think this is a brand new thing, and so it really helps to get, in my opinion, some independent help in implementing it right, because you do have a day job and there is a lot to this. Or, to at least com e in ba ck behind and saying, "Hey, did you think about this?" And so, we put our grumpy regulator hat on with our clients sometimes and talk to them, and cha llenge th em on their ideas and the way they think about things. And it's really hard to challenge yourself on your own ideas and how you think about things. And so that's why I think getting an independent third party, whether it's oyster or a D e loitte or KPMG or EY, you know, is something to co n sider.

Patrick Dennis 19:03

A different set of eyes or a new set of eyes looking at things, sees things differently, obviously. And you know, quite frankly, "you don't know what you don't know." That's just the way life is. You know, you work within your own sphere and everything else, but you really don't know what you don't know. Having a third party consultant that sees a lot of different firms, a lot of different ways this is being done and handled, I think, can be helpful.

Buddy Doyle 19:35

Okay. Well, we're going to wrap up today's podcast. Again, this is the first of a series of five on Reg BI , but we're going to be doing podcasts on a weekly basis at Oyster Consulting. We're going to try to keep them to a time that's meaningful. We know your time is valuable, but if you're struggling with a topic and you'd like us to do a podcast on it, feel free to reach out to us. You can call us at (804) 965-5400 or you can visit us on the web at www.oysterllc.com. Thanks for your time.

Patrick Dennis 20:14

Thanks very much. Thank you.

Music 20:19

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