Broker-dealers’ shift to the independent registered investment advisor model will accelerate due to compliance with the Securities and Exchange Commission’s Regulation Best Interest.
While BDs’ shift to the fee-based model has been happening for years due to consolidation and technology trends, compliance costs associated with Reg BI are likely to accelerate the move. Securities and Exchange Commission Chairman Gary Gensler’s recent comments about enforcing Reg BI to the letter signal that he’s serious about enforcing the rule.
(As of year-end 2019, 3,517 broker-dealer firms were registered with the Financial Industry Regulatory Authority, 90 fewer firms than were registered with the broker-dealer self-regulator in 2018.)
We’re interested to hear from you. How do you see the SEC’s Regulation Best Interest reshaping the advisory business? Let me know what trends you’re spotting this week at [email protected].
Barbara Roper, director of investor protection, Consumer Federation of America
Reg BI is written to include a best-interest standard and mitigation of conflicts. If the SEC were to start enforcing those obligations in a meaningful way, that could lead to significant changes in industry practices. And if the Commission finds that it is not changing industry practices as intended, [Gensler's] comment seems to suggest that they will act on that. Realistically, the Commission was never going to revise the rule without evidence that changes are needed, so [SEC Chairman Gary Gensler’s recent comments that he will enforce Reg BI to the letter and the agency will evaluate the rule] strikes me as an appropriate approach.
One of our concerns with Reg BI when it was adopted was that it used terms like “best interest” and “mitigation of conflicts” but it didn’t really mean them. What Chair Gensler has said is that he means them, and that could lead to a whole different approach to implementation and enforcement, in my opinion.
[As for Reg BI compliance] driving more BDs to the RIA model, this is one reason CFA has also emphasized the importance of strengthening the Advisers Act fiduciary guidance along similar lines.
For too long, advisers’ fiduciary obligation to act in clients’ best interest hasn’t been enforced. And the recent growth of fee accounts at dual registrant firms has introduced some troubling new conflicts. The traditional approach to enforcing the Advisers Act standard, which is heavily reliant on disclosure to address conflicts, isn’t adequate as the conflicts become more complex and opaque.