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Regulation and Compliance > Federal Regulation > SEC

Will Reg BI Be Hammered by Lawsuits?

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Industry officials anticipate a little-changed Regulation Best Interest as well as potential lawsuits after the Securities and Exchange Commission approves on Wednesday its controversial Reg BI for brokers, part of the agency’s four-pronged advice standards package.

“Litigation is certainly possible after the final rules are adopted,” said David Tittsworth, former president and CEO of the Investment Adviser Association who’s now an attorney with Ropes & Gray in Washington.

Before lawsuits are filed, however, Tittsworth said he expects “a lot of plain old legal digging — including [of] those all-important footnotes — to try to figure out what the new rules require and what changes will be required by brokers, investment advisors and dual registrants to comply with the new rules.”

Word on the street a day before the SEC vote is that Reg BI will be only modestly changed from the proposal floated last April.

“The best we’re going to get are some very minor tweaks to Reg BI,” Barbara Roper, director of investor protection for the Consumer Federation of America, said on a Tuesday call with reporters.

The SEC “has left itself open to legal challenge, because it has failed to conduct a legal analysis and because it’s failed to conduct an economic analysis,” Roper stated.

Reg BI “will have a very short shelf life,” Roper opined, adding that a change in administrations and a new SEC would reopen the regulation and call for revisions.

Overshadowed by the Reg BI hubbub is the fact that the securities regulator’s advice-standards package will also likely include a “dramatically weakened definition” of the investment advisor fiduciary standard, Roper said. The “Advisers Act standard could get worse before the vote.”

Michael Koffler, a partner with Eversheds Sutherland in New York, told ThinkAdvisor on Tuesday that broker-dealers will have “a more difficult time adjusting to Reg BI than advisors will” have adjusting to any changes in standards of conduct for them. However, both advisors and brokers will “struggle mightily” with the Customer Relationship Summary, or Form CRS, “unless it’s changed dramatically,” Koffler said.

Dennis Kelleher, president and CEO of Better Markets, argued on the Tuesday call with Roper that Reg BI “provides meaningless protections for investors, who will be misled into thinking their brokers must act in their best interest, when the rule doesn’t actually impose such a duty.”

Kelleher argued that the “disclosure requirements that go with the final rule remain untested and hopelessly confusing, and they could never adequately protect investors. It is a sad day in America when the agency that exists to protect investors decides instead to protect industry profits above investors’ best interests.”

Eversheds Sutherland attorneys write in their Monday brief that the SEC’s Wednesday vote “will come pretty close” to a “do you remember where you were when it happened?” moment, and they’ll be watching to see if the Wednesday meeting “will bring the same level of heated disagreement among the commissioners” that surfaced last April when the package was proposed.

The departure in January of former SEC Commissioner Kara Stein, a Democrat, who dissented on approving the package last year, has left Commissioner Robert Jackson as the lone Democratic voice.

Stein’s presumed successor, Allison Lee, will go before the Senate Banking Committee on Wednesday.

Eversheds Sutherland attorneys state that it “would be a bit of a surprise” if Jackson were to vote in favor of adopting Reg BI, “but his vote probably won’t be necessary, given that there are three Republican voices currently sitting on the commission, and common wisdom is that another party-line vote should be expected.”

Labor Fiduciary Rule

As to comments made Monday by Preston Rutledge, head of the Labor Department’s Employee Benefits Security Administration, that Labor’s upcoming fiduciary rule will “align” with Reg BI, given that the SEC and Labor have different statutory mandates, the key word is “align,” said Fred Reish, partner at Drinker Biddle & Reath in Los Angeles.

The word “align,” Reish said, “is standard government-speak for saying that the DOL will make an effort to avoid requirements in its guidance that is inconsistent with the SEC guidance.”

For instance, if Labor “issues new prohibited transaction exemptions — which I think it will — the exemptions will include some of the SEC’s requirements,” Reish explained.

The exemption “might require that, in order for an advisor to receive variable commissions, the advisor must act in the best interest of the plan and must mitigate any conflicts of interest. However, there are other requirements that the DOL will need to include because of the different statutes that govern the two agencies.”

DOL, for instance, “will need to require that the total compensation be no more than a reasonable amount, which is a requirement of both the Internal Revenue Code and ERISA,” Reish said.

“Align” means “that there will not be fundamental inconsistencies in the guidance of the two agencies, not that the guidance will be identical,” Reish said.

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