Driving progress during an unprecedented year

The challenges of the pandemic were magnified by the implementation of the SEC's Reg BI

2020 will be remembered as a year of adaptation — to new health concerns, to new ways of working and to rethinking how we communicate and drive progress toward our goals.

For the Financial Services Institute, the challenges of the pandemic were magnified by the implementation of a significant change in our industry’s regulatory architecture as the SEC’s new Regulation Best Interest took effect in June.

Despite the unprecedented events of the last 12 months, we are pleased to say that we maintained our constructive working relationships with regulators and legislators to make the voice of the independent financial services industry heard on the key issues that matter to advisers and their clients.

Key developments included:

Fighting regulation by enforcement. In April, we and a coalition of concerned industry groups and public interest organizations filed a petition for rulemaking with the SEC over the commission’s troubling trend of relying on regulation by enforcement.

Our petition focused on the SEC’s 2018 Share Class Selection Disclosure Initiative, which retroactively applied recent and restrictive staff “guidance” against firms that had adhered to long-accepted industry practices regarding recommendations of mutual fund share classes to investors.

While our petition addressed the SCSDI directly, it also voiced our broader concerns about regulation by enforcement, which violates the requirements of the congressionally established rulemaking process and abuses regulators’ immense powers of enforcement to undermine the very purpose of enacted regulation.

Our petition has received many supportive comments, and it has helped inform dozens of meetings with members of Congress, as well as discussions with SEC commissioners and staffers.

We have been encouraged to see that awareness of this problem is growing on Capitol Hill and elsewhere. Senate Finance Committee Chairman Chuck Grassley, R-Iowa, wrote a letter to then-SEC Chairman Jay Clayton expressing his concerns about the agency’s expanding use of the practice, while Sen. Tom Cotton, R-Ark., questioned Clayton about the practice during a Senate Committee hearing.

Facilitating dialogue on Reg BI implementation. We were pleased this year to help rally our industry around Reg BI and to facilitate dialogue among our members that contributed to a smooth implementation process for the new rule.

Prior to the pandemic, we hosted in-person Reg BI workshops where our members came together to share information, discuss concerns and identify solutions regarding the implementation process. This dialogue continued after the pandemic hit, forming the basis for ongoing information-sharing conversations that proved vital to our members’ implementation efforts.

We also drew on these discussions to inform our dialogue with regulators regarding the key issues our members faced in complying with a major new regulation in the midst of a once-in-a-century public health crisis.

As a result, we successfully persuaded the SEC to adopt measured expectations regarding the type and scope of Reg BI training that firms were able to implement, and drove progress in encouraging the SEC to allow electronic delivery as the default option for client documents and disclosures.

DOL PTE proposal and harmonizing standards of care. Introduced the day before Reg BI took effect, the Department of Labor’s proposed fiduciary prohibited transaction exemption took major steps toward our long-stated goal of harmonizing client standards of care across the industry.

The revised exemption — formally released in December — would allow investment advice fiduciaries who work with retirement account holders to offer a broad menu of investment products and services to retirement investors, provided the adviser complies with a standard of care patterned on the one laid out by Reg BI and certain requirements outlined in the exemption.

We pointed out in a comment letter to the DOL that there are some areas for additional improvement, and the proposal may be subject to change with the start of the new administration. Nonetheless, we are encouraged to see regulators actively working to implement cohesive, harmonized standards of care.

Facing the pandemic. When the pandemic struck, we moved quickly to secure relief for our members by emphasizing the need for e-delivery of client documents and working with the Financial Industry Regulatory Authority Inc. to modify its requirements for in-person inspections for 2020 and 2021. We also firmly supported the CARES Act and strongly encouraged legislators to make financial advice more accessible during this chaotic period by restoring the tax deductibility of advisory fees.

While 2020 has been challenging for everyone, we look forward to driving continued progress for independent financial advisers and their clients in 2021.

Dale Brown is president and CEO of the Financial Services Institute.