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Regulation and Compliance > Federal Regulation > SEC

Hopkins, Kitces: As SEC’s Reg BI Goes Live, Worries Remain

By Janet Levaux

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As the Securities and Exchange Commission’s Regulation Best Interest goes into effect today, some industry leaders are speaking about their continued concerns — both with the SEC’s rules and with a proposal announced late Monday by the Labor Department. 

The SEC finalized Reg BI a year ago to ensure that brokers adhere to the same fiduciary standard as RIAs when making recommendations to clients. But while the aim of these rules was to require brokers to act in the best interest of investors, not all believe that Reg BI fulfills that objective. 

“One thing we saw there in my view was a watering down of the fiduciary standard,” said Jamie Hopkins, managing director of coaching for the Carson Group, in a video he posted Tuesday on Twitter. 

“We’re going to see continued concerns around consumers’ ability to distinguish between brokers operating under a best interest and fiduciaries operating under a fiduciary standard,” explained Hopkins, an attorney and certified financial planner, who also is head of retirement research for Carson Wealth.

Such views were argued by blogger and XY Planning Network co-founder Michael Kitces in a failed lawsuit.

On Friday, the U.S. Court of Appeals for the 2nd Circuit ruled in favor of the SEC and said “although Regulation Best Interest may not be the policy that petitioners” XY Planning Network, seven states and the District of Columbia “would have preferred, it is what the SEC chose after a reasoned and lawful rulemaking process.”

XYPN is mulling its legal options, including an appeal.

While the Investment Advisers Act “has long permitted brokers to be (non-fiduciary) brokers and advisors to be (fiduciary) advisors, and Dodd-Frank gave the SEC the option to allow brokers to become fiduciary advisors alongside investment advisors, the SEC chose neither of these paths with Regulation Best Interest,” Kitces explained in a statement emailed to ThinkAdvisor on Friday. 

XYPN “will continue to be active with advocacy at the state level around the very basic principle that advice has only ever been and should always be fiduciary,” the popular blogger said on Monday.

For Hopkins, the language of Reg BI conflicts with that of a fiduciary standard. “The reality is that [the term] best interest actually resonates with clients better. That will appear to be the better standard,” he said.

“That’s scary, right?” Hopkins said. “There’s been research around that’s shown consumers gravitate to that language more than to fiduciary — because they don’t understand what fiduciary is exactly [and that] creates a challenge” for advisors. 

In a poll of more than 40 broker-dealer leaders conducted earlier this year by ThinkAdvisor, about one-third of executives said Reg BI would lead to significant change, another third said it would cause some compliance challenges and confusion, and the final third said it would result in minor impacts on compliance programs and costs. 

Labor’s Fiduciary Exemption

The Labor Department’s latest proposal includes a new exemption for investment advice fiduciaries that would allow them to receive “a wide variety of payments that would otherwise violate the prohibited transaction rules,” such as “commissions, 12b-1 fees, trailing commissions, sales loads … and revenue sharing payments from investment providers or third parties.”

Plus, it would extend the exemption to advice tied to individual retirement account assets and rollovers, including advice given by insurance agents, according to Hopkins. 

There’s “new language coming out from the DOL, a proposed rule coming on its way, it’s nothing like” the previous expansion of the fiduciary rule, which was vacated in 2018, he said.

The DOL is “trying to tie together Reg BI and the DOL rule. But most likely what it’s going to do is take what Reg BI did in watering things down, allowing people to say ‘best interest’ when not a fiduciary, and now operate in some capacity under that inside of the ERISA fiduciary rule — huge concern,” Hopkins explained. “Keep watching out for this.”

Overall, a majority of BD executives, 94%, say their firms will spend more on compliance this year — ahead of technology, 85%; RIA/fee-based programs, 82%; business growth, 73%; and other efforts, according to a ThinkAdvisor poll.  

When asked what issue most keeps them up at night, 37% said compliance, followed by overall pressures tied to fee compression and industry consolidation, 26%. 

— Related on ThinkAdvisor:

Janet Levaux

@Think_JanetL

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