“The SEC talks about the fact that firms must have a reasonable basis to believe that a product is in the best interests of at least some customers," said Susan Krawczyk, a partner at the law firm of Eversheds Sutherland. "What the SEC means is that firms have to vet what goes on their investment platform.”
Hansen said Waddell Reed has a new products and services committee that they beefed up or the DOL rule. “We feel we can tweak it more now, especially to assess if there are conflicts with products themselves and as they relate to other products and proprietary products,” she said.
Making sure that BDs document their rationale for adding and removing products on an investment platform will be critical under Reg BI, Hansen said. “The documentation will go a long way if you’re sitting in front of SEC or Finra and you have to justify what it is reps are selling.”
Determining how to justify keeping products with higher costs remains a hot button fraught with potential liability, executives agreed.
“We are not sure how we will justify higher-cost products, even if advisors prefer a more expensive product over a less expensive one,” said Julie Sullivan, senior vice president and chief compliance officer at The Strategic Financial Alliance Inc.
While the SEC “has been clear that products will have differentiating costs and that cost isn’t the only factor to assess, in my view it is going to be a challenge. But if there is discussion and benefits and risks based on an assessment of suitability on steroids, I do think it is justifiable,” Sullivan added.
Documentation of every decision will be critical because “costs will be the easiest thing for them [regulators] to latch on to,” Miller said. “The presumption is guilty until proven innocent.”
In addition to B-D documentation, getting reps to document what they do with customers and why will be more critical than ever when Reg BI goes live, Hansen said. “You can gather a lot of customer information at the forefront of an account, but at the end of the day, who’s to say it’s the right path? The scariest thing for me about this rule will be when the SEC and Finra come back and try to assess those decisions.”
Added Miller: “As we know, brokers don’t do documentation consistently or thoroughly. But as we’ve all heard from regulators, if it’s not documented, it didn’t happen.”