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Reg BI supporters say it rises above suitability, critics see threat to RIAs

WASHINGTON, D.C. — Is the SEC’s Regulation Best Interest a threat or an opportunity? The answer may depend on your business model.

While broker-dealers see the SEC’s proposal to change standards of advisor conduct as a way to ensure survival of their business model amid regulatory tumult, some RIAs view it as a potential marginalization of theirs.

Reg BI makes a “sincere attempt to preserve the brokerage model, which we think is really important for a lot of clients,” Chris Lewis, the general counsel of Edward Jones, said at FINRA’s annual conference. “It’s not a binary world that we live in. Many clients have both types of accounts.”

SEC Reg BI

The clashing viewpoints mirror a battle unfolding across federal and state regulators. With the Department of Labor’s fiduciary rule dead, the SEC has now taken the lead and is expected to issue Reg BI sometime this year. State regulators, meanwhile, are putting forward their own fiduciary rules.

Executives from two of the nation’s largest BDs — LPL Financial and Edward Jones — made it clear in a panel at FINRA’s annual conference that they favor Reg BI over the alternatives.

Reg BI would reduce clients’ confusion because they would understand it better than the current suitability standard, LPL Chief Legal and Risk Officer Michelle Oroschakoff said.

“It doesn’t have to be the best solution, it doesn’t have to be the cheapest solution, it just has to be appropriate for you, and that’s a lower standard than best interest,” Oroschakoff said. “Putting the customer’s interest first and the associated disclosure obligations are a much higher standard of care to the customer than the existing suitability standard.”

In an interview earlier in the week, NAPFA CEO Geoffrey Brown agreed that clients have trouble grasping suitability and said there’s always been a lack of understanding around it and the fiduciary standard RIAs are held to. NAPFA’s roughly 3,650 members are worried Reg BI would increase confusion, though.

Clashes over the Labor Department's fiduciary rule have carried over into the debate on the SEC's proposed regulation.
August 14

They take issue with the SEC’s draft of “customer relationship summary” documents designed to explain a BD, RIA or dual-registrant’s obligations to a client. Most investors found it too long and wanted it in a different format, an independent survey for the SEC showed in November.

Others said they just didn’t understand the documents or particular parts of them. In addition, Brown maintains the term “best interest” will cause clients to equate brokers with RIAs. However, he sees “no shortage of opportunity to draw that contrast” if the proposal turns into the final rule.

“It seems very clear that the people that were tasked with writing, reviewing, whatever you want to call it, don’t see a difference between best interest and fiduciary, whereas those of us within the fiduciary camp — we know there’s a difference,” Brown said. “And that’s probably the biggest impact of marginalization on the RIA space.”

The panelists at the FINRA conference work in both the RIA and BD spaces, though, since most of their advisors are dual registrants. And they’re “very supportive of the approach” taken by the SEC in the proposal, Edward Jones’ Lewis said.

“Everyone is in favor — I think, at this point — of acting in a client’s best interest,” he continued. “The devil is in the details as to how we align our businesses to execute against it.”

The SEC has received more than 6,000 comments on the Reg BI proposal from brokerages, RIAs, product manufacturers, state securities regulators and attorneys general, members of Congress, consumer groups and individual investors, according to Lourdes Gonzalez, who helped write the April 2018 proposal as the SEC’s assistant chief counsel for sales practices in its trading and markets division.

Its website with the comments also displays transcripts from seven investor roundtables conducted by the SEC and more than 200 meetings with stakeholders by SEC commissioners and staff.

More requirements for disclosure and mitigation of conflicts, along with a best interest standard she allows is similar to the suitability rule, would result in a “big leap forward” by “making the requirement to act in the customer’s best interest explicit in the rule,” Gonzalez said.

“What the commission is trying to do with proposal Regulation Best Interest is really raise the standard of care that brokers have with respect to when they make recommendations to retail customers and, at the same time, find a way to preserve the broker advice model,” she said.

Asked why the SEC didn’t include a fiduciary standard in Reg BI, Gonzalez called it a “damned if you do, damned if you don’t” dilemma for policymakers. But it would spark the question of whether the SEC would use the Investment Advisers Act, ERISA or trust law, she says.

“It’s very easy to bandy these words around, but it’s an empty word until you fill it with something,” Gonzalez said, citing differing perspectives on whether or not it would make the rule stronger. “There are deeply held and conflicting views on this question.”

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