The Securities and Exchange Commission’s Enforcement Division has been quiet about Regulation Best Interest since the retail investment advice rule went into effect 18 months ago, but that silence is unlikely to continue, according to a new analysis from Quinn Emanuel’s SEC Enforcement Practice.
In fact, there are “strong indications” that SEC enforcement of the rule is coming, Kurt Wolfe of Quinn Emanuel’s SEC Enforcement Practice said in the new blog.
“SEC Chair Gary Gensler is under pressure from broad constituencies to show results in the space. For example, at a recent hearing of the Financial Services Committee of the House of Representatives, Rep. Carolyn Maloney (D-N.Y.) encouraged Chair Gensler to ‘take further action to strengthen this rulemaking,’” Wolfe said.
At the same time, “the SEC has signaled that regulated firms may not be getting Reg BI right, and senior SEC officials have made it clear that they intend to take an expansive, perhaps aggressive, approach to Reg BI,” which imposes a heightened best-interest standard on broker-dealers when they recommend securities transactions and investment strategies, Wolfe added.
That may include applying the rule to hold firms to a quasi-fiduciary standard, he said.
Last May, just one month after Gensler took over at the agency, examiners reportedly began issuing requests for information on Reg BI compliance.
Division of Examination’s “focus on Reg BI compliance is likely to result in increased referrals to the Division of Enforcement and in an uptick in settled and litigated Reg BI enforcement actions. We expect that enforcement will come in two waves,” he said.
The first wave of Reg BI enforcement is likely to penalize firms that have failed to implement new or improved policies and procedures to comply with Reg BI, he said.
“This pattern of picking off low-hanging fruit—i.e., identifying and bringing enforcement actions for clear failures to comply—is typical for the SEC’s approach to enforcement of new regulations,” Wolfe continued.
The SEC already has resolved a number of enforcement actions against broker-dealers that failed to comply with the customer relationship summary (Form CRS), the disclosure regulation passed on the same day as Reg BI. More than 28 firms have settled actions with the agency, paying up to $97,500 for railing to file, deliver or post their CRS.