New report suggests there is still much to be done to ensure investors are well protected
With the second part of Canada’s Client Focused Reforms (CFR) rules coming into effect at the end of the year, a new report shows that compelling firms to act in investors’ best interests does not necessarily do that.
While the initial set of CFR requirements is less than six months old, the equivalent US regulations – the SEC’s Regulation Best Interests (RegBi) – has now been in place for more than a year, following a period of ‘good faith’ compliance.
This week, the North American Association of Securities Administrators (NAASA) reported its findings from an analysis of broker-dealer industry policies and practices following the implementation of RegBi.
It revealed that the percentage of broker-dealer firms surveyed that were offering complex, costly, and risky products increased by 11% after Reg BI took effect, and 65% of broker-dealer firms surveyed are not discussing lower-cost or lower-risk products with their customers when they recommend these products.
It also found that:
- No more than 4% of broker-dealer firms surveyed had enhanced their investor profile forms (in any key metric measured) to more carefully match investors with products after Reg BI took effect.
- 3% of broker-dealer firms surveyed took a step backward from their prior suitability procedures by dropping customer education, longevity risk, and tolerance for alternative products from their investor profile forms.
- 24-30% of broker-dealer firms surveyed were still utilizing product-agnostic sales contests, differential compensation, and extra forms of compensation.
No tide-turn
Melanie Senter Lubin, NASAA president and Maryland Securities Commissioner, said that member states had not seen the tide-turning reforms they had expected to.
“This examination reveals that while there were some improvements, most firms are operating in the same manner as they were under the suitability rule, especially when it comes to harmful compensation conflicts,” she said.
The report also revealed that compensation conflicts were mainly in firms that recommended complex, costly, and risky products after Reg BI took effect.
“Some firms are headed in the right direction, but Reg BI has a long way to go to close the investor protection gap separating broker-dealers from investment advisers when it comes to conflicted advice,” said Andrea Seidt, Chair of NASAA’s Regulation Best Interest Implementation Committee and Ohio Securities Commissioner.
