Since Silver Oak was founded in 1999, the financial industry has changed drastically.
Where Are We Now? A Look Back at Two Years Under RegBI
It’s been over two years since the SEC introduced the Regulation Best Interest – better known as RegBI – to establish, as the name suggests, a “best interest” standard of conduct to be followed by financial professionals when they make recommendations to retail customers of any securities transaction or investment strategy involving securities.
RegBI, which went officially into effect on June 30, 2020, enhanced the existing suitability standards to make it clear that financial professionals could not put their financial interests ahead of their customers when making recommendations.
As is typical of the SEC and FINRA when a new regulation is passed, the agencies spent year one assisting the industry in complying with Reg BI by issuing guidance, exam findings, and hosting informational webinars. They audited for RegBI compliance, yes, but with the intent of helping firms understand where they could improve.
More recently, though, they’ve transitioned from warnings to full-on enforcement, with the first case brought against a firm for violations involving recommending and selling unrated, high-risk debt securities.
The message is clear: Comply with RegBI regulations or risk the consequences.
RegBI Challenges for Financial Professionals
The truth is that most, if not all, financial professionals do act in their clients’ best interests. The challenge isn’t in the doing – it’s in the documenting.
For example, if a financial professional is recommending a variable annuity to a client – which may be a great fit for the client – it’s now critical that they not only look at other potential products to recommend, but also document that they considered these products, and include a detailed record of why those products weren’t in the clients’ best interests.
New Retirement Rollover Regulations as of 2022
In February of this year, the Department of Labor’s Prohibitive Transaction Exemption (PTE 2020-02) went into effect, mandating that if a firm recommends that a client should roll over their assets from an employer plan to an IRA, an IRA to an IRA, or from one plan to another, the firm must disclose why the recommendation is in the client’s best interest, disclose the fact that it is acting as a fiduciary under ERISA, and must also provide in writing to the client an explanation of the reasons for the recommendation.
Further, explanation of the fees and expenses associated with the recommendation have to be given to the client at the time of or before the recommendation is made.
For financial representatives, this means navigating and recording the myriad reasons a client might want to roll their plan over – broader diversification, better and more personalized service, greater comfort with the firm, more investment options, etc. Even if it’s ultimately more expensive for them to do so, that doesn’t mean the rollover isn’t in their best interest. It just means that they need to be aware of the cost ahead of time so they can make an informed decision.
Two critical things for financial professionals to keep in mind as it relates to PTE 2020-02:
1. Disclosures and cost explanations that aren’t given at the time of the rollover recommendation can result in the loss of any earned compensation and up to triple damages in fines by the DOL. It’s a steep learning curve for financial professionals not used to providing those disclosures ahead of time, but one that can be quite costly if they fail to master it.
2. Inherited IRAs are still treated as rollovers and require the same recommendation documentation.
Silver Oak’s Approach to RegBI
To help our financial professionals remain compliant with RegBI and the new PTE 2020-02 requirements while still empowering them to focus on running their businesses, Silver Oak takes a proactive approach by providing best interest analysis documents to our professionals to be filled out whenever a new account is established and/or a rollover recommendation is made. Ultimately, this streamlines the process upfront and helps our financial professionals remain compliant.
While our processes will continue to evolve as RegBI comes into focus, we know one thing for certain: we’ll continue to do everything in our power to make changing compliance regulations as easy to navigate as possible for our financial professionals.