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Bates Research  |  11-18-21

NASAA Survey Reveals Some Firms Not Operating Under Reg BI One Year Later

NASAA President Melanie Senter Lubin (photo:

How SEC Regulation Best Interest (“Reg BI”) became the prevailing federal standard for broker-dealer investment recommendations to clients is a long and complicated story. Fraught with political partisanship, sometimes acrimonious policy deliberation and extensive legal debate (including between federal and state regulators), Reg BI raised many questions and concerns that continue to be aired, even to this day. However, as of its June 30th, 2020 implementation date, Reg BI is the rule, which means that compliance with the rule’s requirements is mandatory and enforceable. Since that date, regulators have been vigorous in their outreach efforts, issuing compliance guidance and warnings on examination deficiencies. So the news coming out of a November 4, 2021 North American Securities Administrators Association’s (“NASAA”) reexamination initiative, that “broker-dealer firms still are not abiding by the Reg BI rule now in effect,” was an unpleasant surprise for regulators and rule advocates. Here’s a closer look at what NASAA found and how it is being received.

The NASAA Report

The new NASAA report is the second phase of examinations on broker-dealer policies, procedures, and practices, and the first to review the efficacy of the rule one year out from the compliance deadline. (The first report benchmarked firm practice and procedure prior to the adoption of Reg BI in 2018.) The new report is intended in part to “inform states as they update their own regulations, policies, and examination practices in light of the new federal standard.”  

Both reports were based on electronic questionnaires “issued pursuant to formal examination demands.” For the latest report, NASAA sampled 443 FINRA-registered firms, but focused on a subgroup of 225 broker-dealer firms that also participated in the first phase, and that “affirmatively recommended securities to retail investors,” so as to allow “apple-to-apple comparison of pre- and post-BI behaviors.” NASAA said that the 225 firms surveyed serve more than 77.5 million retail accounts and employ over 316,000 registered representatives. NASAA’s analysis documented the changes firms were making in the transition from the previous suitability standard to the new best interest standard, but highlighted observations from firms that specifically recommended “complex, costly, risky products” (meaning private securities, variable annuities, non-traded REITs, and leveraged or inverse ETFs).

NASAA's examination homed in on “firm policies, procedures, and practices in the areas of due diligence and care, disclosure, and conflict management, corresponding directly to the core elements or ‘obligations’ of Reg BI.” There were a number of  findings, including that: (i) after the Reg BI effective date, there was an 11% increase in broker-dealers offering complex, costly, and risky products, and a majority (65%) of these firms failed to discuss lower-cost or lower-risk products when recommending these products; (ii) very few of the firms (4%) enhanced their investor profile forms to match investors with products, while some (3%) actually dropped previously included information on these forms (including on customer education, longevity risk, and risk tolerance for alternative products); and (iii) more than a quarter of the surveyed firms still used “product-agnostic sales contests, differential compensation, and extra forms of compensation,” conflicts specifically addressed by Reg BI. NASAA noted that these compensation conflicts were concentrated in firms recommending leveraged or inverse exchange-traded funds, private securities, variable annuities, and non-traded real estate investment trusts.

In general, NASAA found that “there were slightly more firms engaging in pro-investor best practices and slightly fewer engaging in harmful conflicts,” but, as NASAA President and Maryland Securities Commissioner Melanie Senter Lubin said in a statement, “This examination reveals that while there were some improvements, most firms are operating in the same manner as they were under the suitability rule, especially when it comes to harmful compensation conflicts.” NASAA concluded that “one full year after the compliance deadline, most of the Reg BI firms sampled are not providing fair and balanced point-of-sale disclosure regarding fees, costs, and risk to retail investors,” despite the fact that “these Reg BI firms have steadily increased their participation in complex, costly, and risky products under the new conduct standard and continue to rely on financial incentives that Reg BI was intended to curb.” NASAA underscored that “too many Reg BI firms are still placing their financial interests ahead of their retail customers in violation of the rule’s chief directive.”

Bates Compliance Reg BI and Form CRS Resource Page

Industry Reaction

SIFMA, perhaps the strongest advocate for the adoption of Reg BI, weighed in quickly. In a statement issued on the same day the report came out, SIFMA said that the NASAA report “misses the mark in terms of the numerous and substantial changes that firms have made to enhance investor protection and satisfy the best interests of their retail investors.” In particular, SIFMA raised that NASAA did not acknowledge the changes made by firms beginning in 2015 and 2016 “when the now vacated DOL fiduciary rule came out,” and how those firms maintained those changes through the finalization of Reg BI in 2019. By failing to recognize these changes, the report is “discounting the true benefits delivered by Reg BI in terms of the positive changes it inspired and requires.” said SIFMA. Other associations, including the American Securities Association (“ASA”) and the Institute for Portfolio Alternatives (“IPA”) put out statements questioning the methodology and focus on products that may be deemed “costly and risky.”

On the other hand, the Public Investors Advocate Bar Association (“PIABA”) issued a statement that NASAA’s report “disappointingly showed” that Reg BI did not improve standards of conduct, as demonstrated by the fact that “firms have not changed their policies, procedures, and practices in the areas of due diligence and care, disclosure, or conflict management.”


Notwithstanding those that challenge the methodology used in the analysis, it is possible that both the NASAA examination results and the industry's critique are true. That is, some firms have failed completely, or are slower to adopt changes to policies and procedures than expected more than a year after mandatory implementation, and the report failed to recognize, in a statistically measured way, the practical cumulative impact on broker-dealer firms of years of attention to raised standards. However, it would be a mistake to disregard NASAA’s findings, or worse, to assume from them that firms are ignoring Reg BI requirements. If anything, the results will only likely raise the stakes for firms who may now have to contend with even greater scrutiny by federal and state securities regulators, who (as recommended by NASAA) will (i) “need to see to it that firms do a much better job of providing fair and balanced point-of-sale disclosure regarding fees, costs, and risks, particularly where a firm is recommending the most expensive and riskiest products in the retail market,” and (ii) “also need to see to it that firms do more to eliminate and mitigate harmful financial incentive conflicts.” NASAA President Lubin stated, “The report should serve as a useful guide for firms seeking to shore up their compliance weaknesses. NASAA and the states look forward to working with the SEC and FINRA in the coming year to get more broker-dealer firms into compliance with this important rule.” Bates will keep you apprised.

How Bates Can Help: 

The Bates Compliance team helps BD, IA and Hybrid firms meet their Form CRS and Reg BI compliance obligations, including further defining conflicts, determining your disclosure approach and mitigating risk to your firm. We develop, review and update Form CRS, and also support firms with Form CRS gap analyses, risk assessments, consistency reviews, and training. For a full list of services, visit our Reg BI and Form CRS resource page.

To locate a Reg BI consulting or testifying expert witness, please visit the Bates Expert Search Page.

For a list of Bates Group’s Litigation and Regulatory related services, visit our Financial Securities Litigation & Consulting and Regulatory and Internal Investigations resource pages.

Contact us today at or call 503-670-7772 to learn how we can support your team and your clients.