SEC Reg BI Stricter Than Fiduciary, Will Cause Brokers to Flee: Peirce

That being said, Peirce admits the “best-interest” term also gives her pause.

The SEC’s proposed best-interest standard “suffers from the same problem the fiduciary standard does — a term that is wonderful for marketing purposes, but potentially misleading for investors,” Peirce opined.

“Just as ‘fiduciary’ has been used to lull investors into not asking questions about their financial professional, so ‘best interest’ runs the risk of becoming a term that encourages investors simply to rely on the fact that their best interest is being taken care of. If we retain the term, we, as regulators, and you, as advisors and brokers, ought to make an effort to encourage investors to look beyond nice terms to the substance of what their financial professional is doing — or not doing — for them and how much she is charging.”

In comparing the proposed Reg BI standard as well as a broker-dealer’s other requirements under the securities laws to an advisor’s fiduciary duty as described in the SEC-proposed interpretive release, only two differences stand out, Peirce said.

First, an advisor “generally has an ongoing duty to monitor over the course of its relationship with its client, while a broker-dealer generally does not.”

Second, a broker-dealer “must either mitigate or eliminate any material financial conflict of interest it may have with its client,” while an advisor “is required only to disclose such a conflict.”

Reg BI, Peirce argued, “would subject broker-dealers to an even more stringent standard than the fiduciary standard outlined in the commission’s proposed interpretation.”

Her fear: “That more and more broker-dealers will decide to become advisors that offer only fee-based accounts resulting in many Americans being shut out” from receiving investment advice.

“We are already seeing this dynamic at work,” Peirce said. “Brokers are taking a hard look at the existing regulatory framework coupled with FINRA arbitrations in which sometimes a fiduciary standard is applied.”

Broker-dealers “look over the fence to the advisor world with its principles-based fiduciary standard, less frequent exams, absence of arbitration, and predictable revenue streams. Having engaged in this comparative exercise, many firms and individual financial professionals say farewell to FINRA, hop on the fiduciary bandwagon, and never look back. Regulation Best Interest could exacerbate this trend.”