by Tracey Longo

 

As the Securities and Exchange Commission pumps the brakes on securities enforcement, the North American Securities Administrators Association is preparing to roll out a regulatory standard of its own to help states better protect investors from financial advisors with conflicts of interest, an NASAA official said in an interview today.

In particular, NASAA wants to stop firms and professionals from using the titles “adviser” or “advisor” unless they are registered as an RIA or investment advisor representative. That goes beyond what the SEC’s own Regulation Best Interest calls for.

The association plans to unveil its new regulatory standard at its annual fall meeting in Scottsdale, Ariz., this year, said Amy Kopleton, chair of the NASAA’s Broker-Dealer Market and Regulatory Policy and Review Project Group.

The association’s model is built around Regulation Best Interest, the SEC’s mandate for advisors to act in their clients’ best interest without conflicts (it went into effect two years ago). The NASAA model regulation was at first significantly tougher, but outcry from the industry persuaded the association’s project group to eliminate a number of requirements in order to track Reg BI more closely instead of forcing advisors to meet higher standards.

Kopleton said that the association removed a lot of the more prohibitive material to help broker-dealers more easily comply. “The version that we have now pretty closely tracks the SEC’s Reg BI, but not exactly,” she said. “Our concern was that a lot of states don’t have the tool box for enforcing Reg BI so they need this model.”

However, the association did clamp down on using “advisor/adviser” as a title without a license. Reg BI didn’t go that far.

“That is one of the gaps that we are trying to fill,” Kopleton said. “If a rep is using an advisor title without being licensed and acting as a fiduciary it will be very confusing for investors.”

A director at the Consumer Federation of America echoed those sentiments in support of title requirements.

“We agree that it is a deceptive and unethical practice for broker-dealers to mislead investors into believing they are acting as investment advisors,” said Micah Hauptman, director of investor protection at the federation. “Using these titles blurs the lines between business models and misleads investors about the true nature of their financial professional’s obligations,” Hauptman said in a comment letter.

The financial services industry and its lobbyists, including the Financial Services Institute, are closely monitoring the model’s development, and they are concerned that a fragmented, state-by-state regulatory approach could create compliance nightmares for their independent broker-dealer and advisor members.

“NASAA has been working on this model for a while and has gone through a deliberative process, incorporating input from FSI and others,” said Dale Brown, the institute’s president. “What independent broker-dealers and advisor-reps don’t want is a patchwork of rules that forces firms and practitioners to navigate a regulatory maze.”

FSI has strongly advocated for incorporating Reg BI language into state rules to maintain consistency, arguing that uniform regulations benefit both investors and the industry. “We continue to work with individual states to ensure alignment with national standards,” Brown added.

While NASAA has significant influence over state regulators, it lacks direct control over how states implement the new model. That means advocates for the financial services industry and investors alike will be closely watching how each state chooses to incorporate—or resist—this tougher standard.

Parham Nasseri, the president of InvestorCOM, which provides regulatory compliance software to wealth and asset managers, sees state-level regulation as a direct response to federal deregulatory trends. “A uniform, nationwide regulatory framework would benefit both the industry and investors,” Nasseri said. “Otherwise, firms must navigate inconsistent requirements—such as varying documentation rules—which can create regulatory arbitrage and market confusion.”

Nasseri said that “recent SEC enforcement actions against improper recommendations—specifically, moving client assets from lower-cost brokerage accounts to advisory accounts—demonstrate that the SEC is still working to fully enforce and interpret Reg BI.”

 

(This article first appeared in Financial Advisor Magazine.)

Tags: Reg BI, Reg BI examinations, SEC Enforcement