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Regulation and Compliance > Federal Regulation > SEC

Fiduciary Advocates Call for Renaming SEC's Reg BI

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If confirmed as chairman of the Securities and Exchange Commission, Gary Gensler needs to rename Regulation Best Interest, something akin to “New Suitability,” fiduciary advocates said Thursday.

“Broker-dealers cannot meet a ‘best interest’ fiduciary standard,” Knut Rostad, president of the Institute for the Fiduciary Standard, said Thursday during a webcast with reporters. “Reg BI needs to be renamed as a broker standard. As a broker standard, it should also be defined.”

Reg BI needs to be rebranded “away from brokers’ best-interest obligation to something that is more appropriate to describe their actual obligation,” agreed Brian Hamburger, founder and leader of the consultancy MarketCounsel and the Hamburger Law Firm.

“Brokers, as they are registered as brokers, are representative of products; they derive their powers by way of a selling agreement between product manufacturers or investment products; and the dealer component, where they have an obligation to distribute that as appropriate to customers,” Hamburger said. “That is a far cry from having to act in a client’s best interest.”

The term “best interest,” added Ron Rhoades, director of the personal financial planning program and assistant professor of finance in the Gordon Ford College of Business at Western Kentucky University, “is intrinsically a term used in hundreds of judicial decisions to describe the fiduciary duty of loyalty. Reg BI is misleading, in its very name. Words matter. Branding matters.”

A “rebranded Reg BI must not mislead investors,” the three agreed in their new paper, ”Major repairs to Reg BI, Form CRS and Adviser Act guidance are proposed to affirm broker and adviser differences and to level with investors.”

Said Rostad, Rhoades and Hamburger: “Product recommendations are not similar, associated or related to fiduciary advice. Recommending a product is not fiduciary in nature or by design; it is non-fiduciary advice.”

The three held the webcast to discuss their new paper. More papers will be forthcoming.

Will the SEC Act Under Gensler?

“Renaming the rule will require an amendment to the rule,” Rostad said. “I think we’ve got every reason to believe [Gensler] he’ll be open-minded to the nature of these changes.”

The Dodd-Frank Act gave the commission the authority to promulgate a uniform fiduciary standard for retail investment advice, added Hamburger. “Congress has spoken; the most effective way that we can get back on track here is for Congress to speak again. Is for Congress to insist that the SEC act in compliance with the law. Practically speaking this would require the SEC to amend” Reg BI.

Added Rhoades: Reg BI, “by its very name, is likely the greatest securities fraud in the history of the SEC. It needs to be a new rule to, at a minimum, reboot the term ‘best interest’ from describing a broker-dealer standard of conduct.”


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