Unanswered Reg BI Questions As Agents Prepare

By Elizabeth Festa

Insurance agents and brokers are carefully preparing for Regulation Best Interest with training, risk assessments for conflicts of interest — and also with detailed questions to help fine-tune the process.

Industry experts expect that with the increase in documentation, firms will have to do a better job of keeping notes and documenting the recommendation process, as more pieces of paper are presented to clients.

In this new environment, the most impacted will be those who weren’t already acting in their client’s best interests, although the vast majority do, according to Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute.

If the market swings in one direction or another in the future and the firm is challenged on its advice, agents need to show that they are following the proper process, he noted. An insurance agent could be faced with an adult child, spouse or legal representative “who doesn’t care if you had a great relationship with the client,” but wonders why you picked one product when you could have picked something better and there would have had more to retire on, Berkowitz explained.

Advisors and agents need to be able to go back to their files and stand by the choice by showing why they made the recommendation, he said.

“Make sure all the factors that were relevant are there and make sure you put it in writing,” he said. Berkowitz pointed to relationship management tools that can keep track of dialogues and considerations.

Training Is Key

“Training is an essential part,” said George Hanley, managing director in the regulatory and operations risk practice at Deloitte, who works with firms implementing these customized, high-quality systems and making “tremendous efforts.” Hanley, former global chief compliance officer at Prudential Financial, said the evolution of the new standard will continue to be discussed after June, when Reg BI goes into effect.

In terms of future enforcement, firms will be watched how the examination process unfolds between the SEC and FINRA, he said.

Hanley doesn’t think that the advent of new standards will dampen sales of annuities. There has been movement for several years for this kind of standard in one form or another, and agents and registered reps have been preparing for enhanced diligence and documentation, Hanley said.
Products that are either risky or complex call for suitability systems in place and enhanced record-keeping, Hanley said. In comparison to just two years ago, a lot more tools are available to facilitate comparative product assessments, Hanley said.

However, questions have arisen about the circumstances under which BI is triggered in the relationships, such as whether advisers need to keep contemporaneous notes while chatting with clients at social functions or entertainment events.

The tools that firms are designing can help with inputting notes made afterward —it would be weird to start writing down notes while out on a golf course, Berkowitz said.

Questions That Need Answers

To address nuances in interpreting the regulation, the Financial Services Institute sent the Securities and Exchange Commission’s Standards of Conduct Implementation Committee almost two dozen questions and suggested answers on supervision, fee schedules and conflicts of interest while implementing Reg BI and Form CRS requirements. An FSI spokesperson said it has not yet gotten a response on these from the agency.

The Form CRS rules require the delivery of a relationship summary to each retail investor when the firm enters into an investment advisory contract, oral or written. FSI has questions about whether a dual registrant that provides advisory services through an independent registered investment adviser (RIA) who is the only party to the contract with a retail investor would also have to deliver a relationship summary to the investor.

Reg BI also requires disclosure of fees and costs related to the transactions, holdings and accounts. FSI wants to know if a broker-dealer can have a fee schedule for a customer on its brokerage platform and another fee schedule for a customer for whom it provides brokerage services when the assets managed by a third party RIA. It suggests that this would be okay, but further disclosures and a recognition of potential conflicts of interest could kick in.

FSI also wonders whether Reg BI applies to a licensed insurance professional who also holds a Series 6 license “when recommending the sale of a fixed annuity to a retail customer that will be funded by liquidating securities?” The suggested answer is that “Reg BI would apply only to a registered representative’s recommendation to liquidate securities” and not to the recommendation to purchase a fixed annuity, which isn’t covered by Reg BI.

Another consideration now is the National Association of Insurance Commissioners revised Suitability in Annuity Transactions Model Regulation, adopted Feb. 13. It requires an understanding of the annuity products and the work that will be involved in evaluating whether a variable annuity recommendation meets that standard might require more work on part of the advisor, it can be argued, according to Berkowitz.

The nice thing about the NAIC model is law is that it thoughtfully aligns with the product agnostic SEC Reg BI, so advisors can leverage that, Berkowitz said.

Elizabeth Festa, based in Washington, D.C., has been reporting on insurance and finance for more than 15 years. She may be contacted at [email protected].