John Taft: Reg BI the best we could have hoped for

The SEC rule takes the existing regulatory regime for broker-dealers to an entirely new level and preserves choice for investors

Jun 12, 2019 @ 12:02 pm

By John Taft

Nine years after the Dodd-Frank Act gave the Securities and Exchange Commission authority to raise the bar for individual investor protection, the SEC finally took the bull by the horns last week, approving its long-awaited Regulation Best Interest by a 3-1 vote.

The rule takes the existing regulatory regime for broker-dealers to an entirely new level, creating for the first time a heightened best-interest standard for broker-dealers that should, over years to come, contribute to improved trust and confidence among investors in their financial service professionals.

The new standards avoid many of the shortcomings in the Department of Labor's fiduciary rule, which opponents had argued would lead to greater cost, less choice, and fewer products, services and options for retirement savers. Significantly, Reg BI applies more broadly than the DOL fiduciary rule to cover all retail investor accounts, not just retirement accounts, and will allow the SEC to enforce a more consistent standard of adviser care across the wealth management industry.

Also crucially important is that Reg BI seeks to preserve access and choice for individual investors as to who (what kind of advisers) they work with, what mix of services best serve their wealth management needs and how they pay for those services (commissions or fees or a blend of the two).


The SEC's best-interest standard materially exceeds existing suitability standards created and enforced by the Financial Industry Regulatory Authority Inc., adding new and heightened care, disclosure and conflict-of-interest obligations.

For example, under Reg BI, recommendations must not only be suitable but also in the customer's "best interest." This means broker-dealers cannot put their interests ahead of the interests of the customer.

(Webcast: SEC Advice Rule: What you need to know)

Under Reg BI, broker-dealers must mitigate and in certain cases eliminate financial conflicts of interest. Disclosure of a financial conflict alone is not considered adequate under the rule, effectively holding broker-dealers to a higher standard than the one applicable to investment advisers today, where conflicts can be disclosed and waived by investors. Not so in Reg BI. This is truly a best-interest standard with real teeth.

Reg BI also, refreshingly, takes a principles-based approach, similar to the fiduciary standard applicable to investment advisers under the Advisers Act. This means the rule will go into effect with many questions left unanswered; it will be years before policies, procedures and supervisory practices settle into shared best practices. Compliance with the rule will not be easy for the industry, or cheap. Firms will no doubt need to make changes to their business practices and those costs will no doubt be significant.

Predictably, critics dismiss the rule as weak and a sellout to the industry. But these criticisms come largely from a segment of the industry that believes in a one-size-fits-all approach to wealth management.

SEC chairman Jay Clayton addressed this in his opening remarks at last Wednesday's SEC meeting, stating, "a one-size-fits-all approach to regulating [broker-dealers] and [registered investment advisers] doesn't work because B-Ds and RIAs have inherent differences; thus the SEC does not recommend a 'uniform' standard for B-Ds and RIAs."

Every individual and every family is unique when it comes to their wealth management goals and needs. The optimal mix of commission-based brokerage accounts, discretionary advisory accounts, retirement accounts, fees and commissions varies across wealth management clients. And firms dually registered as broker-dealers and registered investment advisers are best positioned to deliver that kind of customized advice.

In the long run, the legacy of Reg BI most worth celebrating likely will be the fact that it recognizes and preserves the importance of access and choice for individual investors. On that score alone, it is, quite probably, the best enhancement to regulations of investment advice we could have hoped for.

John Taft is vice chairman of Baird. He is a past chairman of the Securities Industry and Financial Markets Association, and currently serves on its board of directors.


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