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SEC sets date for Reg BI, but will it mollify critics’ concerns?

The SEC and Department of Labor are moving closer to resetting the rules governing how advisors and brokers serve their clients.

The commission will vote June 5 on its proposed Regulation Best Interest, according to a regulatory notice issued by the SEC. It’ll be an opportunity to see whether the SEC, which has received a lot of public and industry feedback, has significantly amended any aspects of its contested plan to update standards of conduct for advisors and brokers.

Consumer advocates have criticized the commission’s proposal for falling short of a fiduciary standard. Wall Street trade groups and brokerage firms, meanwhile, have given the proposed regulation a warmer reception than they gave the Department of Labor’s 2016 fiduciary rule, which would have required brokers and advisors to put clients interests first when providing investment recommendations on retirement assets.

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Joe Ratterman of Bats Global Markets Inc., Nasdaq OMX Group Inc arrive for a meeting at the Securities and Exchange Commission in Washington, D.C., U.S., on Monday, May 10, 2010. The chief executive officers of the biggest U.S. stock markets were called to a meeting at the U.S.Securities and Exchange to discuss last week’s selloff in equities, according to four people familiar with the situation. Photographer: Joshua Roberts/Bloomberg

“I don’t think it would come up for a vote if there wasn’t some assurance it will pass. And I don’t expect it to be different than what the proposal was,” says Christine Lazaro, director of the Securities Arbitration Clinic at St. John’s University and president of PIABA. “As an investor advocate I still have concerns about whether it will add meaningful protections for investors.”

Advisors and trade groups resist a patchwork of regulations, saying it would limit consumer choice and increase firms’ expenses.
March 28

Lazaro says she’d like to see a clear statement that a broker has to put a client's interest before their own. She’s also keen to see how the SEC addresses concerns about how its proposed regulation would mitigate conflicts of interest. Will it do more than simply requiring conflicts be disclosed?

The Labor Department, meanwhile, has indicated it will revisit its defunct fiduciary rule and issue a new proposal in December, which could allow it to sync its efforts with those of the SEC.

Wall Street lobbying groups, such as SIFMA and FSI, previously sued the Labor Department to prevent the fiduciary rule from going into effect, claiming that it would impose higher compliance costs and be cumbersome to implement. A federal appeals court vacated the fiduciary rule in 2018.

Fiduciary advocates, however, have seen their cause taken up by state regulators. Nevada and New Jersey have moved forward with their own fiduciary rules. The Garden State is currently taking public feedback on its proposal to raise standards of conduct.

The state fiduciary movement has prompted a backlash from the brokerage industry. Morgan Stanley and other large firms have threatened to pull business from Nevada.

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