The Securities and Exchange Commission’s proposed Regulation Best Interest, or Reg BI, for brokers is a “more stringent” standard than the fiduciary standard outlined in the agency’s proposed interpretation for advisors, and could “exacerbate” the trend of brokers fleeing Financial Industry Regulatory Authority oversight, according to SEC Commissioner Hester Peirce.
In a July 24 speech titled “What’s In a Name: Regulation Best Interest vs. Fiduciary,” Peirce, a Republican, argues that neither the term “fiduciary” nor “best-interest” is clearly defined, and that the “oft-repeated” fiduciary mantra “will have the perverse effect of harming investors.”
The word “fiduciary,” Peirce said, “hangs heavily over any discussion about standards for financial professionals,” with the term carrying “a lot of different meanings, and legal context matters.”
A fiduciary under the Employee Retirement Income Security Act, for example, “means something other than a fiduciary” under the Investment Advisers Act of 1940, Peirce said.
“Even within the same legal context, the term ‘fiduciary’ can change over time.”
Investors, she continued, “are told repeatedly that all they need to ask is one simple question about their financial professional: Are you a fiduciary? Suggesting that a single word assures you that the person with whom you are dealing will serve you well dissuades investors from asking the questions they should ask before choosing a financial professional” and “provides a false sense of reassurance to retail investors.”
Peirce suggests that the term fiduciary “is so powerful that some people seem to be assessing our proposed Regulation Best Interest solely based on the absence of the word in the new standard.”
(Related: SEC Clarifies ‘Inadvertent Custody’)
If the agency is not calling its advice standard for brokers “fiduciary,” she said, “it must not be good, in the minds of some.”