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NASAA issues report on compliance by brokerages with Regulation Best Interest

On Behalf of | Sep 15, 2023 | Financial News

The North American Securities Administrators Association has issued a report examining how firms are complying with Regulation Best Interest, according to WealthManagement.

The analysis was conducted by NASAA’s Broker-Dealer Section Committee as part of the organization’s Coordinated National Regulation Best Interest Initiative.  Under Reg BI, implemented by the SEC in 2020, broker-dealers are required to recommend only products that are in their customers’ best interests.

The NASAA report focused on four types of complex, costly, risky products – leveraged and inverse exchange-traded funds, non-traded REITs, variable annuities, and private placements (CCRs).  Over 200 firms were questioned on their compliance with Reg BI.  This was the Phase II (B) Exam, the sequel to two prior Regulation Best Interest exam initiatives conducted by the NASAA membership.

The study found that while brokers are making progress in their policies and procedures to meet Reg BI obligations, they still have further to go on certain elements of compliance, such as offering customers reasonably available alternatives to recommendations and mitigating conflicts of interest.

The regulators also concluded that firms recommending CCR and other risky products are imposing product-specific restrictions based on age, net income/worth, and risk profiles and are using exception reports to monitor compliance with those restrictions.

Firms are using helpful cost-comparison tools to better consider reasonably available alternatives, but are still ignoring common lower-cost and lower-risk products when recommending CCRs, the report found.

“While the Phase II (B) exams reveal helpful and steady implementation progress by the firms examined, firms are still relying heavily on suitability policies and strategies that predated Reg BI,” the NASAA study states. “Efforts to address the standard of care concepts established by Reg BI remain perfunctory. In short, more work needs to be done to truly elevate the standard of care for retail customers.”

The NASAA study also found that 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. Firms were reported to be ignoring lower-cost and lower-risk investments when recommending complex products.

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