SIFMA issues State of the Industry Briefing, FINRA recaps on Reg BI

Trade association assesses market trends while regulator pulls together guidance on Reg BI.

Insights into key trends in the capital markets, along with an overview of priorities on behalf of members in the year ahead, were shared at the annual State of the Industry Briefing from the Securities Industry and Financial Markets Association (SIFMA) last week. SIFMA President and CEO Kenneth Bentsen was joined at the event by Ken Cella, Chair of SIFMA’s 2023-2024 Board of Directors and Principal, External Affairs and Community Engagement for Edward Jones.

FINRA also issued a Regulatory Notice to recap recent SEC staff guidance on Regulation Best Interest (Reg BI).

To be honest, the staff guidance documents to which the FINRA Notice refers each goes a bit beyond the contours of Reg BI as a rule in some respects. The documents are important to read for their explanations; but it will also be important to keep an eye on whether FINRA examiners will end up reviewing broker dealer Reg BI compliance against the rule itself or use the more expansive staff interpretations stated in those three documents.

Industry trends and SIFMA lobbying

Markets are soldiering through the Federal Reserve’s actions to tame inflation, 10-year Treasury rate fluctuations, and other macroeconomic factors, Bentsen and Cella said.

Inflation, rising rates, recession risk, wars, regional bank turmoil, debt ceiling debate, and a US sovereign debt downgrade by a ratings agency were all headwinds, but equity markets remain in positive territory, +19.4% from January to November, and we are seeing better issuance this year than last, they said.

“However, we continue to experience significant uncertainty and the environment keeps changing. As we move into 2024, we should get more clarity on the going-forward state of the economy, the cost of credit, and the discount rate for stock valuations,” Bentsen and Cella noted.

SIFMA just released its semiannual survey by its SIFMA Economist Roundtable, a group that includes 20+ chief US economists from global and regional financial institutions, detailing their expectations for unemployment, inflation, and interest rates, among other matters.

This latest survey found:

  • 87% of survey respondents believe the Fed is done, so no more rate hikes; and
  • 47% of respondents expect the Fed might begin cutting rates in 2Q24, followed by 27% each for the third and fourth quarters of 2024.

Regulatory activity

In 2023, we saw a continued uptick in regulatory activity, the cumulative impact of which has the potential for far-reaching consequences, Bentsen and Cella said.

This activity is led by the SEC, they pointed out, which has proposed 63 new rules since 2021, of which 24 have been finalized.

In 2023, the SEC proposed 20 new rules and finalized 17 pending proposals. The SEC has indicated it intends to propose another 11 rulemakings according to the agency’s Reg Flex Agenda.

Looking at the pending SEC rule agenda, Bentsen and Cella said they remain focused and concerned about several major rulemakings including equity market structure (order competition, best execution, tick size, Rule 605 on order execution and routing, and fee tiering, in particular), plus Treasury market transparency and clearing, alternative trading systems, open end fund liquidity, custody, predictive data analytics, and Regulation Systems Compliance and Integrity (Reg SCI).

Transaction settlement cycles

Just 170 days from today, the US will transition from the current T+2 days settlement cycle to T+1, Bentsen and Cella say.

They are referring to the SEC’s final rule amendments – enacted in February – that will shorten the standard settlement cycle for most broker-dealer securities transactions from two business days after the trade date (T+2) to one business day (T+1). The SEC believes that shortening the settlement cycle to T+1 will reduce market participants’ exposure to credit, market and liquidity risk arising from unsettled transactions. Broker-dealers will be required to comply with the amended rules on May 28, 2024.

In 2020, SIFMA and its industry partners the Investment Company Institute and The Depository Trust & Clearing Corporation began collaborating on efforts to move to T+1. The membership group is now leading several industry working groups to help prepare for the transition and test systems and has published The T+1 Securities Settlement Industry Implementation Playbook to assist market participants with their transition work.

SIFMA lobbying

SIFMA has implored US regulators not to implement a planned Basel III Endgame package of reforms — as well as rules related to resolution planning and longer-term debt requirements for non-globally-systemically-important (GSIB) large banking organizations (<$100B) and foreign banking organizations.

The Basel rules focus on the amount of capital that banks must have against the credit, operational, and market riskiness of their business.

These requirements could unjustifiably and unnecessarily increase capital requirements, putting firms at a competitive disadvantage and harming the economy, markets, businesses and households, Bentsen and Cella said.

SIFMA also contends the US Department of Labor’s proposed and expanded fiduciary duty proposal threatens to limit investor access to advice and education while also limiting their choice in advisers, they said. And the trade group submitted a comment letter to NASAA on its recent, proposed revisions to its model rule related to broker-dealer business conduct, which SIFMA says illegally and unjustifiably expands the requirements of the SEC’s Reg BI.

FINRA issues Reg Notice on Reg BI

FINRA’s Notice 23-20 assembles all of the guidance and other resources available to assist member firms with their compliance efforts in connection with Reg BI.

In particular, FINRA highlights the SEC’s series of Staff Bulletins reiterating standards of conduct for broker-dealers and investment advisers: 

  • SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors
  • SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest; and 
  • SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations.

Level of dissonance

These resources can go a long way in helping member firms better implement the mandates associated with the four obligations (Disclosure, Care, Conflicts of Interest, Compliance) that comprise Reg BI within their compliance program policies, procedures, and training modules.

But some level of dissonance has been observed between what the SEC staff has outlined in the guides and what it has stated in the actual rule.

As one example, Reg BI requires broker-dealers to “establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.” The April 2023 Staff Bulletin (noted and hyperlinked above) adds to this general obligation by stating that firms should have a specific “process” for the evaluation of reasonably available alternatives. That requirement was not included at this level of detail in Reg BI.

According to the Bulletin, this “process” should include guidance (for example, policies and procedures, employee training) for the firm’s financial professionals that defines the scope of alternatives that should be considered and the factors that should be weighed (for example, costs, potential benefits and risks as well as compatibility with the retail investor’s investment profile) in evaluating the available alternatives.

In 2023, the SEC proposed 20 new rules and finalized 17 pending proposals. The SEC has indicated it intends to propose another 11 rulemakings.

Although Reg BI has been around for a couple of years, the SEC notes in its 2024 enforcement priorities that its main attention in the next year will be determining whether broker-dealers have established, maintained, and enforced written policies and procedures to achieve compliance with Reg BI as a whole.

Notice 23-20 might present a few questions in those few areas where the guidance documents noted within it add a bit of “flourish” to the actual rule’s prescriptions. But, overall, it is a helpful window into the SEC staff’s thinking on the rule, and the guidance will likely inform SEC staff rule interpretations and be used in examinations and investigations, so a careful reading of the pieces listed is important.