SEC Expected to Approve Reg BI in “the Next Few Months” but Final Outcome Remains Uncertain

Douglas Wilbert, Managing Director Risk and Compliance

The Securities and Exchanges Commission is expected to roll out its standards-of-conduct regulation, commonly known as Regulation Best Interest or Reg BI, in the next few months, but there is still some uncertainty over the outcome of the proposal – even from within the Commission.

The proposed Reg BI would require broker-dealers to act in the best interest of their customers as part of the Commission’s goal of enhancing retail investor protection and decision-making. It clarifies the fiduciary duty owed by investment advisers to their clients and requires both broker-dealers and investment advisers to state clearly key facts about their relationships, including compensation. The proposal also calls for more candid and mandatory plain-language disclosures.

At the 46th annual SIFMA Operations Conference & Exhibition in Boca Raton, Fla., SEC Commissioner Robert Jackson said there are two potential outcomes for Reg BI: In a best case scenario, regulators would be able to get in a room and hammer out an agreement that all sides can live with and, in another scenario, partisanship would prevail and derail a final decision.

Commissioner Jackson, who voted for the proposal when it was introduced in April 2018, admits the initial rules contained complex language and needed to be simplified. The mandatory plain-language disclosure requirements also needed finetuning, he said.

“I don’t want to be a guy who is on the SEC and voted for us to give you another piece of paper that goes in the trash…Having four pages that someone is going to throw away, doesn’t make any sense,” the commissioner said, referring to the proposed Customer Relationship Summary form or Form CRS, a disclosure document that would provide investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other, more detailed disclosures.

SIFMA (the Securities Industry and Financial Markets Association) generally supports Reg BI and the SEC’s goal of setting best interest standards across the industry. The association’s chairman, James Allen, CEO of Hilliard Lyons, admits there will be costs associated with the implementation of Reg BI due to changes to systems, processes and procedures. However, Allen believes the cost is manageable and, at the end of the day, will turn out to be a good investment because it will enable firms to serve their clients better.

Presently, SIFMA is primarily concerned with competing standards-of-conduct regulations issued in various states, including Nevada and New Jersey. The association favors a national standard and consistency across all states.

During an onstage interview at the SIFMA Ops Conference, Allen said a patchwork of state regulations will confuse clients, be disruptive to firms’ service models and interfere with their ability to serve clients the way they want to be served.

Financial institutions with fiduciary responsibilities should stay atop the developments of the SEC’s proposed regulation as it will require certain changes to processes and documentation and potentially make it easier for securities regulators to bring enforcement actions against those institutions.

Subscribe to our blog to stay informed on this and related topics.

Add comment