WASHINGTON, D.C. – (September 5, 2023) – The North American Securities Administrators Association (“NASAA”) today published a report on Phase II (B) of its Coordinated National Regulation Best Interest Examination Initiative. As explained in the report, firms have made progress updating their policies and procedures in light of the Securities and Exchange Commission’s (“SEC”) 2019 adoption of Regulation Best Interest (“Reg BI”) but more work remains to be done, particularly with respect to considerations of reasonably available alternatives and conflict mitigation.
NASAA also published for public comment proposed revisions to NASAA’s model rule regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents which are intended to update the model rule in light of Reg BI and other developments in the securities industry. The comment period will run for 90 days.
“Regulation Best Interest has been in effect now for over three years, and state securities regulators continue to conduct examinations for compliance,” said NASAA President Andrew Hartnett. “This report suggests that firms have made more progress implementing the rule than the last NASAA report in 2021, but there remains room for improvement.”
NASAA’s Broker-Dealer Section Committee compiled findings from over 200 broker-dealer examinations conducted by states that evaluated compliance with Reg BI. The examinations were particularly focused on certain complex, costly, and risky products (“CCRs”) – leveraged and inverse ETFs, non-traded REITs, variable annuities, and private placements.
The Phase II (B) report found that firms have been updating their investor profile forms and enhancing their policies and procedures to focus more directly on Reg BI obligations and that many firms recommending CCRs are imposing product-specific restrictions based on age, net income/worth, and risk profiles.
On the other hand, the report also found that some firms are still ignoring common lower-cost and lower-risk products as part of the reasonably available alternative comparison and that there is little uniformity in effective conflict mitigation. Additionally, the report found continued improper use of the “advisor” or “adviser” title.
The report also highlighted other findings and best practices by firms as well as ways to improve Reg BI compliance, including by imposing product-specific restrictions and monitoring with exception reports, using cost-comparison tools to better consider reasonably available alternatives, and including lower cost and reduced cost products in comparisons. Firms are encouraged to review the report to improve their own practices to comply with Reg BI.
Separately, the proposed revisions to NASAA’s model rule regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents are the product of extensive efforts by several NASAA working groups over the past three years. The objectives of the proposal are to incorporate the core principles of and definitions from Reg BI and SEC guidance into NASAA’s existing broker-dealer conduct model rule, define these principles and their components for purposes of state law, and make other changes consistent with Reg BI.
“I am extremely proud and appreciative of the work of my many NASAA colleagues who helped develop this proposal,” said Stephen Bouchard, Chair of the NASAA Broker-Dealer Section Committee and Associate Commissioner for Securities, District of Columbia Department of Insurance, Securities & Banking. “We look forward to hearing from investors, broker-dealers, and other interested parties on this proposal.”
“States will continue to conduct broker-dealer exams that include a focus on complex, costly, and risky products and enforce Reg BI concepts contained in the applicable rules,” said Clinton Edgar, Chair of the NASAA Broker-Dealer Operations Project Group and Deputy Securities Commissioner, Texas State Securities Board.”
The Phase II (B) examination report and the proposed revisions to NASAA’s broker-dealer conduct model rule are now available at nasaa.org. The 90-day comment period for the model rule proposal ends on December 4, 2023.
– NASAA–
About NASAA:
Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of the securities regulators in the 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the 13 provincial and territorial securities regulators in Canada, and the securities regulator in México. For more information, visit www.nasaa.org.
For More Information:
Fred Baldassaro, Director of Communications
fbaldassaro@nasaa.org | 202-737-0900
Karen Grajales, Communications and Investor Outreach Manager
kgrajales@nasaa.org | 202-737-0900
