SEC chairman emphasizes Reg BI protections on rollovers, complex product sales

Pandemic conditions make acting in clients’ interests even more important, Jay Clayton says

Securities and Exchange Commission Chairman Jay Clayton is warning financial advisers that acting in a client’s best interests is more important than ever during the coronavirus pandemic, especially on recommendations regarding retirement assets, complex investments and investments related to the COVID-19 outbreak.

In a statement released Monday night, Clayton reiterated something that everyone in the investment advice sector knows: Regulation Best Interest, the new advice standard for brokers, must be implemented on June 30.

In early April, Clayton maintained that deadline despite the disruptions that the pandemic is causing for brokerages, many of whom have registered representatives working from home.

In Monday’s statement, Clayton outlined areas in which brokers and investment advisers, who will continue to adhere to fiduciary duty, must be especially careful not to put their own financial interests ahead of those of their clients.

He highlighted recommendations to roll over or withdraw funds from 401(k) accounts, which has become easier to do thanks to pandemic relief legislation.

“Firms should be particularly attuned to their regulatory obligations in light of the additional flexibility Congress recently provided investors to take withdrawals from certain accounts,” Clayton said in the statement.

He also said advisers should take particular care when recommending complex or risky products, investments related to COVID-19 and structured investment vehicles.

Kurt Wolfe, an attorney at Troutman Sanders, said the SEC Office of Inspection Compliance and Examinations likely will zero in on the areas Clayton highlighted when assessing Reg BI compliance.

“I would anticipate that the exam staff and possibly the enforcement division will take a close look at recommendations of these products and investments and related supervisory policies and procedures,” Wolfe said.

In addition to the initial announcement that the June 30 Reg BI deadline would hold and the reinforcement of that message on Monday, the SEC has released risk alerts on Reg BI and the disclosure document Form CRS.

“It’s fascinating [Clayton] did this because it’s unusual, if not unprecedented, to give this number of reminders,” Wolfe said. “It reflects how important this rule is to the commission.”

Clayton’s emphasis on Reg BI also indicates that it’s central to his legacy, said Marlon Paz, a partner at Mayer Brown.

“He sees this as defining his investor protection mandate,” Paz said. “He sees this as exactly what Main Street needs during a time of market disruption.”

But Clayton’s doubling down on the Reg BI implementation date didn’t assuage the concerns of one investor protection advocate.

Kate McBride, managing partner at FiduciaryPath, a fiduciary training and assessment firm, said Reg BI is weak because it relies on disclosure of broker conflicts rather than addressing them more forcefully.

Clayton’s emphasis on Reg BI “doesn’t mean the rule is going to be good for investors,” said McBride, a member of the Committee for the Fiduciary Standard. “In my heart of hearts, I want this to be a good rule. But I’m skeptical. This administration doesn’t have a good record of putting the interests of the public before the interests of corporations.”

Clayton’s latest statement makes clear to those holding out hope for a compliance delay that they won’t get one.

Some brokerages are struggling to meet the June 30 deadline.

“They’re trying to do the right thing, but there are challenges,” Paz said.