SEC Commissioner Hester Peirce. (Photo: Herb Perone/IAA) SEC Commissioner Hester Peirce. (Photo: Herb Perone/IAA)

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.”

(Related: 3 Ways SEC Reg BI Could Confuse Investors: Reish)

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.”

That being said, Peirce admits the “best-interest” term also gives her pause.

The SEC’s proposed best-interest standard “suffers from the same problem the fiduciary standard does — a term that is wonderful for marketing purposes, but potentially misleading for investors,” Peirce opined.

“Just as ‘fiduciary’ has been used to lull investors into not asking questions about their financial professional, so ‘best interest’ runs the risk of becoming a term that encourages investors simply to rely on the fact that their best interest is being taken care of. If we retain the term, we, as regulators, and you, as advisors and brokers, ought to make an effort to encourage investors to look beyond nice terms to the substance of what their financial professional is doing — or not doing — for them and how much she is charging.”

In comparing the proposed Reg BI standard as well as a broker-dealer’s other requirements under the securities laws to an advisor’s fiduciary duty as described in the SEC-proposed interpretive release, only two differences stand out, Peirce said.

First, an advisor “generally has an ongoing duty to monitor over the course of its relationship with its client, while a broker-dealer generally does not.”

Second, a broker-dealer “must either mitigate or eliminate any material financial conflict of interest it may have with its client,” while an advisor “is required only to disclose such a conflict.”

Reg BI, Peirce argued, “would subject broker-dealers to an even more stringent standard than the fiduciary standard outlined in the commission’s proposed interpretation.”

Her fear: “That more and more broker-dealers will decide to become advisors that offer only fee-based accounts resulting in many Americans being shut out” from receiving investment advice.

“We are already seeing this dynamic at work,” Peirce said. “Brokers are taking a hard look at the existing regulatory framework coupled with FINRA arbitrations in which sometimes a fiduciary standard is applied.”

Broker-dealers “look over the fence to the advisor world with its principles-based fiduciary standard, less frequent exams, absence of arbitration, and predictable revenue streams. Having engaged in this comparative exercise, many firms and individual financial professionals say farewell to FINRA, hop on the fiduciary bandwagon, and never look back. Regulation Best Interest could exacerbate this trend.”