Big-name firms are pressing the North American Securities Administrators Association to withdraw proposed revisions to its model rules for broker/dealer conduct.
Representatives for firms including Robinhood, Morgan Stanley, Raymond James, LPL Financial and Cetera Financial Group warned the rule fell far short of its purported purpose of aligning with Regulation Best Interest, with Cetera Regulatory Affairs Director Mark Quinn calling the proposal “fundamentally flawed” in its current form and was unable to be “salvaged.”
“The Project Group and the Broker-Dealer Section should return to the drawing board and start over with this entire initiative, preferably with advance input from the industry and other affected constituents,” he wrote in Cetera’s comment letter on the proposal.
Industry lobbyists and advocacy groups including the Financial Services Institute and Securities Industry and Financial Markets Association also criticized the proposal in letters submitted during a comment period ending Dec. 4.
But commenters weren’t wholly negative, with support coming from several not-for-profit legal programs representing harmed investors with small-dollar claims, including Fairbridge Investor Rights Clinic at the Elisabeth Haub School of Law at Pace University and the Securities Arbitration Clinic in the St. Vincent de Paul Legal Program at St. John’s University School of Law.
“We believe that NASAA’s proposal provides timely and needed clarity regarding the meaning of the term ‘recommendation,’ and that it will encourage broker/dealers to use (digital engagement practices) in a manner that is consistent with the best interests of their customers,” Fairbridge Professor and Director Janene Marasciullo wrote, co-signed by the group’s student interns.
NASAA introduced the amendments in September to update its model rules “in light of” SEC’s Reg BI, which went into effect in 2020. According to NASAA, working groups within the association have been developing updates for several years.
In one change, NASAA specified that some conduct obligations cannot be satisfied through disclosure alone.
“Based on examination findings the committees believe it is necessary to emphasize and elevate this guidance into the text of the rule as many firms are relying too heavily on disclosure as their primary or sole means of complying with the care and conflict of interest obligations under Reg BI,” according to NASAA.
NASAA also specified that b/ds must “make all reasonable efforts” to avoid or excise conflicts of interest, and that they must be disclosed and mitigated if they couldn’t be avoided. Additionally, the proposals clarify that a recommendation can also refer to b/ds using fintech, asserting that a recommendation was a “well-established concept with sufficient elasticity” to accommodate technological industry shifts.
But this raised registrants’ ire, with Fidelity Brokerage Services Chief Legal Officer Charles Sturdy writing in a comment letter that the proposed changes alter the definition of a recommendation to any communication that “features” or “promotes” a security or strategy.
“By dramatically expanding the concept of what constitutes a recommendation … the proposed rule would likely require broker/dealers to conduct a best interest analysis for each customer prior to granting that customer access to a firm’s website and other digital planning and guidance tools and education materials, and other content that is made generally available to customers,” Sturdy wrote.
Additionally, NASAA received seven comment letters at the close of the comment period with identical wording urging the association to withdraw the proposal altogether, with the only differences being the locations and names of the supposed writers.
With the comment period closed, relevant groups and committeesd within NASAA will begin reviewing the letters to determine whether any changes should be made to the proposal. NASAA officials told WealthManagement.com there was no set timeline for this process.