State Securities Commissions report that many firms cling to complex, costly, risky products without alerting investors to lower-cost and lower-risk products.

WASHINGTON, D.C. (November 4, 2021) – The North American Securities Administrators Association (NASAA) today announced the results of a nationwide survey conducted by state securities regulators that provides the first comprehensive look at broker-dealer industry policies and practices following the implementation of Regulation Best Interest (Reg BI) by the Securities and Exchange Commission. Today’s 2021 Reg BI Phase Two Report follows NASAA’s 2020 Reg BI Phase One Report that analyzed financial services industry policies and practices prior to the implementation of Reg BI.

“NASAA’s member states did not see the tide-turning reforms they had expected to see in the broker-dealer industry after Regulation Best Interest took effect,” said Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner. “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.”

Notable findings from NASAA’s Regulation Best Interest Phase Two Report include:

• The percentage of broker-dealer firms surveyed that were offering complex, costly, and risky products increased by 11% after Reg BI took effect.
• 65% of broker-dealer firms surveyed are not discussing lower-cost or lower-risk products with their customers when they recommend these products.
• 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. These compensation conflicts are rarely seen in fiduciary firms, observed in only 0.5-3% of investment advisers examined in Phase I.

Compensation conflicts were concentrated in firms that recommended complex, costly, and risky products after Reg BI took effect.

• 40% of broker-dealer firms surveyed that recommended leveraged or inverse exchange-traded funds had compensation conflicts, as did 41% of firms that recommended private securities, 44% of firms that recommended variable annuities; and 52% of firms that recommended non-traded real estate investment trusts.
• Only 35% of broker-dealer firms surveyed that recommended complex, costly, and risky products after Reg BI took effect reduced the financial reward associated with these products by capping agent sales credits.

“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.

Today’s report is the sequel to NASAA’s Phase One benchmarking report issued in early 2020, which assessed industry practices prior to implementation of Reg BI. State examiners from 35 jurisdictions examined 443 broker-dealer firms in the second phase of the initiative. The report focuses on the progress made by 225 firms that were examined in both phases of the initiative and have transitioned from the suitability standard to the new, best interest standard of care. These 225 firms serve more than 77.5 million retail accounts and employ over 316,000 registered representatives.

“The report should serve as a useful guide for firms seeking to shore up their compliance weaknesses,” added Lubin, “NASAA and the states look forward to working with the SEC and FINRA in the coming year to get more broker-dealer firms into compliance with this important rule.”

—NASAA—

 About NASAA:

Formed in 1919, NASAA is a nonprofit association of state, provincial and territorial securities regulators in the United States, Canada and Mexico. NASAA has 67 members, including the securities regulators in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, with a shared mission of protecting investors from fraud and abuse. For information, visit: www.nasaa.org.