Page turning was in full swing on June 5 as the Securities and Exchange Commission rubber-stamped Regulation Best Interest for brokers and the agency’s advice-standards package — which combined totaled around 1,000 pages.
The final Reg BI came in at approximately 771 pages, taking up the bulk of the four-pronged plan. Industry officials contacted said they were, naturally, still combing through the package, but nonetheless had some initial thoughts to share.
All four prongs of the advice-standards package — Reg BI, the Form CRS Relationship Summary, the Standard of Conduct for Investment Advisers, and a new Interpretation of “Solely Incidental” — passed by a 3-1 vote, with SEC Commissioner Robert Jackson, a Democrat, dissenting on all parts.
Jackson stated that his hope was that the final rules would leave “no doubt that investors come first. Sadly, I cannot say that. Today’s rules maintain a muddled standard. Today’s rules simply do not require that investors’ interests come first.”
Jackson stated that he couldn’t vote for any of the four prongs of the plan, as neither Reg BI nor the advisor recommendations “requires Wall Street to put investors’ interest first.” SEC Commissioner Hester Peirce, a Republican, noted the “aggressive” compliance date of June 30, 2020. She also said that while the highly-criticized Form CRS has been improved, more work needs to be done.
In his opening remarks at the June 5 open meeting, SEC Chairman Jay Clayton argued that the standard of conduct action “is long overdue. The fact that it is overdue does not make it easier. I believe the delay has made it more difficult as many interested parties have developed strident and divergent views on the state of the market, as well as current law and regulation, and what should be done to better serve the interests of our Main Street investors.”
Clayton said that Reg BI “will substantially enhance the broker-dealer standard of conduct beyond existing suitability obligations, requiring broker-dealers, among other things, to act in the best interest of their retail customers when making a recommendation, including not placing their financial or other interests ahead of the interests of the retail customer.” Reg BI also requires the following:
Disclosure obligation: Broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.
Care obligation: The broker-dealer must establish, maintain and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. The obligation, an enhancement from the proposal, specifically requires policies and procedures to:
• Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest or the interests of the firm ahead of the retail customer’s interest; •Prevent material limitations on offerings, such as limited product menu offering only proprietary products, from causing the firm or its financial professionals to place his or her interest or interests of the firm ahead of the retail customer’s interest; and • Eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.
Compliance obligation: A new requirement from the proposal, broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Reg BI.
Blaine Aikin, executive chairman at Fi360 in Pittsburgh, a fiduciary education, training and technology company, told me at press time that Reg BI “does raise the suitability standard a bit higher than it is today for broker-dealers.”
That said, however, Aikin sees the entire advice package as weakening investor protections. Reg BI “cannot be considered in isolation; the other three parts of the regulatory package are intertwined with Reg BI. Taken together, the package must be viewed as a setback for investor protection and for the profession of investment advice,” he said.
The package, Aikin continued, “does not clearly delineate best interest, rather it obfuscates the fundamental differences between fiduciary advice and sales recommendations.”
Bottom line according to Aikin: the package “will add to investor confusion, exacerbate the problem of low public trust in financial services and add to tensions across the multiple factions that have formed over the lack of clear and client-centric regulations for all who provide advice: Wall Street versus Main Street, brokers versus advisors, and Republican versus Democrat legislators.”
The June 30, 2020, compliance date will “arrive quickly,” Aikin said, and “firms will be challenged to interpret the regulations, tailor business practices to be both compliant and competitive, and deliver training to advisors.”