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Regulation and Compliance > State Regulation

Stifel CEO Praises SEC Reg BI, Blasts House Vote

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Stifel CEO Ronald Kruszewski. (Photo: Bloomberg) Stifel CEO Ronald Kruszewski. (Photo: Bloomberg)

The House of Representatives’ vote on Wednesday approving an amendment to stop the Securities and Exchange Commission from enforcing Regulation Best Interest is purely “partisan” politics, argues Ron Kruszewski, chair-CEO of Stifel Financial Corp., in an interview with ThinkAdvisor.

Reg BI’s “principles of fiduciary care” for the brokerage model “dramatically enhance” The Financial Industry Regulatory Authority’s suitability standard, raising the standard of conduct for brokerage accounts “as high as and in many cases higher than” the standard for RIAs, he maintains.

Stifel offers both brokerage and advisory models. “I’m not picking sides,” Kruszewski stresses. “I’m an advocate for client choice.”

Stifel manages more than $100 billion in advisory accounts, notes Kruszewski, who joined the firm as CEO in 1997. The public company’s total assets under management were $270 billion as of Dec. 31, 2018, according to Stifel’s “Fact Sheet for 2019.”

“When people say that brokers don’t act in the consumer’s best interest, while people under the 1940 [Investment Advisers] Act do, I think that’s a completely inaccurate portrayal of the market,” Kruszewski tells ThinkAdvisor.

He is chair of the American Securities Association (ASA) and serves on the board of the Securities Industry and Financial Markets Association (SIFMA).

In an Aug. 7, 2018, letter to SEC chair Jay Clayton, Kruszewski recommended a standard of care “essentially uniform across brokerage and advisory models.” That’s what Reg BI provides, plus more, he says.

ThinkAdvisor yesterday interviewed Kruszewski, on the phone from Stifel headquarters in St. Louis. This year the chief executive was appointed to serve a sixth consecutive one-year term on the Federal Advisory Council of the St. Louis Federal Reserve Board of Directors.

Here are excerpts from our interview:

THINKADVISOR: What’s your reaction to the full House approval of Maxine Waters’ amendment to block the SEC from enforcing Regulation BI? 

RON KRUSZEWSKI: I view this as political. I feel this has become a partisan issue. I personally object to blocking the orderly implementation of a regulation which would provide strong investor consumer protection for almost 50 million households.

How does Reg BI do that?

I want to be clear that I’m not an advocate that favors one business over another; that is, brokerage over advisory. Stifel has accounts under all models. I’m an advocate for client choice and believe that all models should have a duty of loyalty and a duty of care. I also believe in disclosure.

What’s your assessment of Reg BI as adopted on June 5?

It’s an excellent rule that enhances investor protection while maintaining client choice and access to advice. Regulation BI is the most comprehensive enhancement of the standard-of- conduct rule governing broker-dealers, frankly, since the passage of the Securities [Exchange] Act of 1934.

How does Reg BI compare with FINRA’s suitability standard?

It dramatically and undeniably exceeds the previous suitability standard under FINRA. It encompasses investor protection while maintaining the brokerage model.

How does Reg BI help RIAs, BDs, independent FAs and wirehouse brokers?

First of all, Reg BI doesn’t apply to RIAs. They work under the Investment Advisers Act. Reg BI [addresses] accounts under the 1934 Act. But Reg BI benefits all because it raises the conduct standard for brokerage accounts so they’re as high as, and in many cases higher than, the standard for RIAs.

How so?

Under Reg BI, you must make full and fair disclosure. And not only do you have to disclose [conflicts], you also have policies and procedures to mitigate or even eliminate them. That’s the higher standard. In an advisory, you can disclose away a conflict. I’m speaking from experience because I have advisory accounts [in my firm]. The disclosure requirement regarding conflicts is a higher standard under Reg BI than it is under the 1940 [Investment Advisers] Act.

In a letter on Aug.7, 2018, to SEC chair Jay Clayton, you wrote that you were in favor of a standard of care that is “essentially uniform across brokerage and advisory service models.” Now that Reg BI has been adopted, how does it stack up?

Regulation Best Interest imposes a standard of care and loyalty that I was recommending. And then they went even further by enhancing the disclosures: you need to mitigate or eliminate. They also added the word “skill,” which you have to have when making a recommendation.  That said, I think it’s going to be costly to implement, especially [because of] the [required] Form CRS Client Relationship Summary [for disclosures]. But in the end, [Reg BI] will be beneficial to consumers and the industry alike.

Is the standard of care indicated in Reg BI a fiduciary standard?

Well, let’s not get caught up in terms. The term fiduciary means different things in different contexts, and I think this is one of the confusing aspects [to consumers] of this rule. For example, an ERISA fiduciary in my firm has different requirements than an investment advisor’s fiduciary duty under the ’40 Act.

Please comment on how the issue of fiduciary is treated in Reg BI as compared to that of RIAs.

It’s very important to note that Reg BI applies the same fiduciary principles to the brokerage model: a duty of loyalty — a duty to act in the best interest of the customer, to not place a broker’s interest ahead of the customer. Likewise, Reg BI has a duty of care — to act with diligence, care and skill in making an investment recommendation.

So consumers are gaining with Reg BI?

Well, sure. First of all, they’re able to maintain choice to [obtain] brokerage advice, which is often less expensive than fee-based accounts. But they also gain the benefit of an enhanced standard from the brokerage model. I expect it will result in consumers receiving better financial advice that’s aligned with their interest.

What are your thoughts about the states proposing their own rules, as have New Jersey, Massachusetts and Nevada?

State regulations create patchwork regulation, which isn’t good for our markets in general, not only securities markets.  So we have to be careful that we don’t begin to impose different requirements at the state level, which could potentially disrupt national markets. I also believe that the SEC, who has been charged [with] being the regulator of our national markets, should be allowed to do their job.

Do you think that FAs and RIAs will bring up the subject of Reg BI with clients?  

I know they will. It will be a little confusing [to consumers] at first; but in the long run, it’s a good thing for the client relationship because it explains the differences between brokers and advisors, whether or not you offer both, benefits and, maybe, the cost of [each]. That’s one of the great things that came out of Reg BI: helping to educate consumers.

Does Reg BI have any shortcomings?

Given the difficult task and the balances that are struck, Regulation BI is a good rule.

Is anything missing from it?

No. It’s a principles-based rule that has 800 pages of explanation. I think it’s pretty comprehensive. It applies the principles of loyalty and care to the brokerage model. Consumers should know that whichever model they choose, they’ll have those same standards: The industry will place the client’s interest first.

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