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Regulation and Compliance > Federal Regulation > SEC

Is SEC's Reg BI Coming in Q1?

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Welcome back to Human Capital! I’m Melanie Waddell in Washington, bringing you the latest insights on the players influencing the financial services regulatory landscape. 

New House Financial Services Committee Chairwoman Maxine Waters, D-Calif., kicks off the week as Democrats officially took control of the House Thursday. Waters promises to crack down on abusive financial practices, ensure “strong safeguards” are in place to prevent another financial crisis and conduct keen oversight of regulators — including the Securities and Exchange Commission and its much-anticipated Regulation Best Interest. 

Scan down to see how attorneys are reading the tea leaves on the likelihood that Reg BI, part of the agency’s advice-standards package, will get finalized in the first quarter. 

Waters was among 35 House Democrats who complained to SEC Chairman Jay Clayton late last year that the agency’s Regulation Best Interest — part of the securities regulator’s much-anticipated advice standards package — was not a true fiduciary standard.

Industry officials see Waters raking Clayton over the coals once the advice-standards package is finalized. Will it happen in the first half of 2019, as officials have predicted? Bob Plaze, former co-director of the SEC’s Division of Investment Management who’s now a partner at Proskauer Rose in Washington, told me he sees the government shutdown throwing a wrench in the SEC’s plans. “The SEC is not open for the staff to work on it,” Plaze said, adding that he believes the SEC commissioners “are a ways off from figuring out what to do” with the advice-standards package.

Plaze said that he interpreted Clayton’s recent comments to the Senate Banking Committee that the agency may use the same language to describe the standard of conduct that investment advisors and brokers must adhere to when advising retail clients under the SEC’s advice-standards package as “treading water.”

Clayton “will have two new commissioners to deal with who did not participate” in pushing out the original proposal last April, Plaze said, speaking of newly christened Commissioner Elad Roisman, a Republican, and the vacant seat left by Kara Stein, a Democrat who stepped down at year-end.

“None of the commissioners who considered the original proposal seemed very happy about it for an assortment of reasons,” noted Plaze. (Republican Commissioner Hester Peirce and Democratic Commissioner Robert Jackson both voiced reservations, but Stein cast the sole dissenting vote.)

George Michael Gerstein of Stradley Ronon in Washington, however, opines that the Trump administration and SEC “will continue to stay laser-focused” on getting Reg BI over the finish line.

Norm Champ, former head of the SEC’s Division of Investment Management who’s now a partner at Kirkland & Ellis in New York, said that while he hopes Waters “will support Clayton and the SEC in making sure U.S. capital markets remain the best and deepest in the world,” it’s “important that any standard for brokers recognizes the differences between the broker business model and the investment advisor business model.”

The fact that Waters and other House democrats will be focused on whether Reg BI “provides adequate protection for investors, and particularly for Main Street investors … may tilt the SEC thinking slightly,” adds Fred Reish, partner in the Los Angeles office of Drinker Biddle & Reath. “But the SEC is an independent agency and is fairly far along in the process of finalizing the regulation.”

Because the Democrat-controlled House still must collaborate with the Republican Senate, “the House cannot unilaterally impose its will,” Reish said, which means there likely won’t be “a strong fiduciary requirement in legislation in this Congress.”

Bottom line: “The SEC will finalize its best-interest proposals in the next few months and the final guidance will be similar to the proposals.”


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