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July 08, 2019 at 03:35 PM
The Securities and Exchange Commission’s new best-interest standard for broker-dealers won’t take effect for almost another year but the transition could be very rough, and not just because of the “very aggressive implementation timeline” that SEC Commissioner Hester Peirce has warned about.
Already the House of Representatives has passed legislation to prevent implementation of the rule, but the Senate is not expected to follow suit. The differences between the two branches, however, may serve to highlight the controversies surrounding the rule.
In addition, “a number of industry groups are readying lawsuits against the SEC BI rule, which will likely gain some degree of traction,” said Brian Hamburger, founder and managing director of MarketCounsel, at a recent Pershing symposium for RIAs held in New York. He would not elaborate.
Marcia Wagner, founder of the Wagner Law Group, which specializes in ERISA and employee benefits law, says there is “a high likelihood that a civil action will be filed against Reg BI on the basis that the rule fails to comply with the intent of Dodd-Frank, if not the specific language of the Act, by not establishing the same standards for broker-dealers and investment advisors, or an inadequate economic analysis.“
Meanwhile, more states are expected to enact or introduce their own fiduciary rules, inspired in part by the failure of the SEC to do so in Reg BI. Those rules, too, are likely to be subject to lawsuits given the opposition already expressed by financial firms and industry groups to fiduciary rules that have already been proposed.
To date New Jersey, Nevada and Massachusetts have proposed fiduciary rules for broker-dealers, and legislators in Maryland, whose first attempt at a fiduciary rule failed earlier this year, and New York are considering their own state proposals.
Reg BI: Not Suitability Nor Fiduciary
The almost 800-page Reg BI essentially lowers the fiduciary standard that investment advisors are required to follow under the Investment Advisers Act of 1940 while raising the suitability standard, enforced by the Financial Industry Regulatory Authority, for broker-dealers, Hamburger said.
RIAs, for example, would not have to eliminate all conflicts of interest that would prevent them from acting in the best interests of their clients so long as they disclosed those conflicts.
But broker-dealers would be required to go beyond recommending investments that they deem suitable for clients and put their clients’ interests above their own, including the costs of their recommendations for their clients.
Broker-dealers would also need to disclose specific conflicts of interest when they arise, but not all potential conflicts need be eliminated. Contests that reward brokers for high-volume sales of individual products would be eliminated, but not contests that reward brokers for accumulated high-volume sales of multiple products, for example.
