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Regulation and Compliance > Federal Regulation > SEC

SEC Chief 'Cautiously Satisfied' With Reg BI but Seeing Some Troubling Trends

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Securities and Exchange Commission Chairman Jay Clayton said Monday that he was “cautiously satisfied” with Regulation Best Interest but noted that three months after its enforcement date he’s noticing some troubling trends.

Reg BI was “overdue — we needed to do this,” Clayton said during a question-and-answer session with Ken Bentsen, CEO of the Securities Industry and Financial Markets Association, during SIFMA’s virtual yearly meeting.

Bentsen queried Clayton on what the SEC has learned from three months of enforcing the rule. “We needed to raise the standard of conduct for brokers,” Clayton said, “but what we’re seeing is a lot of things.”

The dual-hatted professional — the investment advisor/broker-dealer registered representative — now subject to Reg BI “is finding out that while the compensation models are different, and BI has an enhanced disclosure around commissions and the like, …  overall the standard that you owe your customer is very much the same,” he explained.

“You’re seeing that in the dual-hatted professional … in the disclosure, and that’s frankly what we want to see. You know your customer, you have policies and procedures to ensure that the products are correct for the customer — that there’s disclosure — and that you’re not putting your interests ahead of the customer’s interests,” Clayton added.

With Reg BI, “It’s going pretty well. We now have a fair amount of … harmonization across the customer experience — whether you’re in a commission model or a fee-for-service model,” he said.

“We both know there are some products where a commission model is much better for the customer than an annual fee-for-service model, including in this low interest rate environment,” Clayton said.

Preserving customer choice “enhances competition,” he continued. “That’s our job, to promote competition in the marketplace.”

Concerning Trends

When asked if he’s seeing any trends that concern him, Clayton stated that he’s “cautiously satisfied” with Reg BI, but noted some “outlier” trends that bother him. One being around disclosure of disciplinary history.

“If you have a disciplinary history, the answer is ‘yes’,” Clayton said. “You can talk to your client about it, but your client or your customer should know that you have it …. It’s one of the single most reliable indicia of future problems.”

Disclosing disciplinary history “is a key part of Form CRS,” he added, “and it applies to both broker-dealers and investment advisors.”

Bentsen also queried Clayton on whether Reg BI, as a largely principles-based rule, will be stagnant or evolve. “All principles-based rules are evolving rules,” Clayton responded. “That’s why you use principles, because you know the market is going to change, you know products are going to change.”

Reg BI, however, also includes components that require “policies and procedures,” Clayton added. “You have to deal with conflicts.”

— Check out SEC Clarifies Form CRS Rules on Reporting Disciplinary History on ThinkAdvisor.


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