SIFMA says Reg BI raises broker standard above investment adviser requirements

Investor advocate Roper: SIFMA wouldn't support SEC proposal if it reformed broker practices

Dec 6, 2018 @ 2:09 pm

By Mark Schoeff Jr.

A major financial industry trade association asserted Thursday that the Securities and Exchange Commission's investment advice reform proposal would result in brokers having to meet a higher standard of care than investment advisers.

The SEC proposal revolves around the so-called Regulation Best Interest, which would require brokers to act in the best interests of the clients and is designed to be a step up from the current suitability standard administered by the Financial Industry Regulatory Authority Inc.

Under the measure, the SEC would continue to regulate brokers separately from investment advisers, who must adhere to a fiduciary standard when working with clients.

In its annual state of the industry press conference, the Securities Industry and Financial Markets Association said the SEC succeeded in raising the bar for brokers.

"The proposed best interest standard materially exceeds the existing Finra suitability standard to the benefit and for the protection of retail customers," Jim Allen, chairman and chief executive of Hilliard Lyons and SIFMA's 2019 chairman, said in a press conference. "Under Reg BI, broker-dealers must mitigate financial conflicts of interest. Just disclosing a financial conflict is not considered adequate under the proposed rule, effectively holding broker-dealers to a higher standard than the one that applies to investment advisers today."

Mr. Allen extolled the SEC proposal for having "real teeth," but an investor advocate said that it would not bite brokers.

"Neither the SEC nor SIFMA has identified a single concrete example of how broker-dealer practices will be forced to change under Reg BI," said Barbara Roper, director of investor protection at the Consumer Federation of America.

On Wednesday in Las Vegas at the MarketCounsel Summit, Financial Services Institute president and CEO Dale Brown said Regulation Best Interest does not represent a substantial change from suitability.

Under the suitability rule, brokers must sell products that meet a client's investment objectives but are free to recommend those that give the broker the highest revenue.

Mr. Allen said the SEC proposal would ensure that brokers mitigate such conflicts, while investment advisers can simply disclose them away.

Ms. Roper agreed that the SEC has given a green light to advisers to disclose rather than mitigate conflicts, but said SIFMA is pushing the agency to allow disclosure to satisfy mitigation.

"It's cynical for SIFMA to cite [mitigation] as a benefit of Reg BI when they are lobbying to eliminate that distinction between the two standards," Ms. Roper said. "They want [broker] conflicts to be addressed by disclosure alone, too."

SIFMA acknowledged there are many questions about what the SEC has in mind when it comes to curbing conflicts.

The SEC should "give more guidance and clarification about what those conflicts are and how they would define mitigation," said Kenneth E. Bentsen Jr., SIFMA president and chief executive.

SEC chairman Jay Clayton has not indicated when the agency will release a final rule. Most observers expect it to act in the first half of next year.

The SEC has received about 6,000 comment letters on the proposal. But Mr. Allen doesn't expect much revision to the package. He predicted that compliance costs for the industry would be "significant but manageable."

"I wouldn't expect it to be that difficult to implement given that it's where our industry is heading anyhow in terms of how we are dealing with our clients," Mr. Allen said.

Ms. Roper isn't surprised that SIFMA is on board with the SEC proposal.

"Chairman Clayton has a rule that is supported only by the broker-dealer industry," she said. "If this rule actually reformed broker-dealer business practices to the benefit of investors, SIFMA would be opposing it."


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