DOWNLOAD: NASAA Regulation Best Interest Implementation Committee National Examination Initiative Phase One Report

WASHINGTON, D.C. (September 22, 2020) – Results of a nationwide examination of broker-dealers and investment advisers by state securities regulators provide the first comprehensive look at industry practices prior to the implementation of the Securities and Exchange Commission’s Regulation Best Interest and provides important benchmarking data to help measure the effectiveness of the new federal standard of care regulation.

The results were included in a report on a comprehensive benchmarking initiative issued today by the Regulation Best Interest Implementation Committee of the North American Securities Administrators Association (NASAA).

Examinations were conducted in the first quarter of 2020 of more than 2,000 broker-dealer and investment adviser firms representing more than 360,000 investment professionals and 68 million retail investment accounts. State examiners from 34 jurisdictions participated in the coordinated initiative. The examinations were designed to establish a baseline of practices as they stood in 2018 in several areas, including sales of complex and risky products, compensation practices, including sales contests, cost comparison, fee disclosure and conflict management.

“The examinations identified compliance challenges for industry. We appreciate the strong industry cooperation in these examinations and we look forward to seeing how industry addresses these challenges,” said Lisa Hopkins, NASAA President and West Virginia Senior Deputy Securities Commissioner.

The examinations found notable differences between broker-dealers operating under a suitability standard and investment advisers operating under fiduciary duties. For example:

• Investment advisers generally took more conservative investment approaches overall, avoiding higher cost, riskier, and complex products. Investment advisers also reported more robust due diligence, disclosure, and conflict management practices.

• Broker-dealers offered a more diverse set of product offerings than investment advisers.

• Few firms offered complex, risky products like private offerings, variable annuities, non-traded real estate investment trusts (REITs), and leveraged- or inverse- exchange-traded funds (ETFs). In fact, two-thirds of the firms surveyed did not make any of these products available to their customers.

• When complex products were sold, broker-dealers were twice as likely as investment advisers to recommend the purchase of leveraged and inverse ETFs, seven times as likely to recommend private placements, eight times as likely to recommend variable annuities, and nine times as likely to recommend non-traded REITs.

“Both broker-dealers and investment advisers have a significant opportunity to improve under Regulation Best Interest in order to better serve the interests of their retail clients,” said Andrea Seidt, Ohio Securities Commissioner and Chair of NASAA’s Regulation Best Interest Implementation Committee. “We are closely watching the industry’s early implementation of the SEC’s Regulation Best Interest with an eye toward determining whether the rule benefits investors as intended.”

Hopkins said state securities regulators will conduct follow-up examinations next year to assess the effectiveness of Regulation Best Interest. The report is available on NASAA’s website, www.nasaa.org.

– NASAA –