How much will costs of products and accounts factor into Reg BI?

Documentation will be key to passing exams under the rule, observers say

Jun 14, 2019 @ 10:55 am

By Mark Schoeff Jr.

A recently approved Securities and Exchange Commission advice reform package seems to be of two minds about what emphasis brokers should put on the costs of their recommendations.

Language was added to the final Regulation Best Interest, which is designed to raise the broker standard of care, that requires brokers to consider product and account costs. But the rule also says costs are one of many factors that can be taken into consideration when determining what's in the best interest of the customer.

Those competing messages put a premium on keeping track of the reasons behind the advice, members of a regulatory panel at Pershing's Insite conference in Phoenix told attendees Thursday.

"The need for documentation is something you all are going to have to focus on," Joan Schwartz, Pershing chief legal officer, said during the breakout session.

Ira Hammerman, executive vice president and general counsel at the Securities Industry and Financial Markets Association, said the principles-based SEC rule is both a blessing and a curse.

On one hand, it allows flexibility in how registered representatives and firms comply. On the other, it means the SEC may find fault with something brokers thought they got right. Documentation will be key as the regulation evolves through examinations and enforcement, Mr. Hammerman said.

"We will have to get ready for that exam that we know is going to happen," he said on the panel. "They're going to want to see records."

Much of the execution of the rule will be left in the hands of brokers and firms. The measure does not define "best interest." Although it requires policies and procedures for disclosing and mitigating or eliminating conflicts of interest, it is up to firms to decide which require mitigation.

Ms. Schwartz would like to see more guidance from the SEC.

"It would be helpful to get clarity on when the conflict requires disclosure, mitigation or elimination," she said in an interview.

Disclosures also could be tricky, according to Ms. Schwartz.

Under the rule, brokers and advisers will continue to be regulated separately, with Reg BI intended to bring the broker advice requirement closer to the fiduciary duty to which investment advisers adhere. This could create a balancing act for those registered as both a broker and an adviser.

"Dual registrants will have to determine how they can engage with investors differently under the two standards," Ms. Schwartz said.

While the brokerage industry wrestles with complying with Reg BI by the June 2020 deadline, both Mr. Hammerman and Ms. Schwartz said they hope states, such as New Jersey, will halt their efforts to establish their own fiduciary duty rules.

"States should reflect on what the SEC just did and slow down," Mr. Hammerman said.


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