SEC’s Blass rebuts assertion Reg BI is tougher than fiduciary standard

Agency director says investment advisers must mitigate or eliminate conflicts.

Even before the Securities and Exchange Commission approved new investment advice reform rules in June, there was debate about whether the broker requirement would be tougher than the standard for investment advisers.

One of the authors of the package, Dalia Blass, director of the SEC Division of Investment Management, said Wednesday that Regulation Best Interest — designed to raise the broker bar above suitability — has not eclipsed the fiduciary duty investment advisers must continue to meet under the new SEC regulations.

“It is not true to say that the broker-dealer standard is higher than the fiduciary standard,” Ms. Blass said at a Securities Industry and Financial Markets Association seminar in Washington.

Some in the brokerage industry, as well as SEC commissioner Hester Peirce, have suggested that Reg BI, as it’s known, has sharper teeth than a fiduciary duty because it requires brokers to mitigate conflicts of interest.

But Ms. Blass said investment advisers also must mitigate or eliminate conflicts in the interpretation of the adviser standard that was part of the rule package.

“To say that mitigation is not there in the advisory world is not correct and to say one standard is higher than the other is also not correct,” Ms. Blass said.

In a SIFMA session later in the afternoon, Ms. Peirce was more nuanced in comparing Reg BI to the fiduciary standard than she was previously, saying they’re both strong. She said Reg BI is more prescriptive and applies to a recommendation, while fiduciary duty is ongoing and applies to a relationship.

“It depends on which perspective you’re taking,” Ms. Peirce said in a follow-up interview.

(More: SEC chairman Clayton defends Reg BI, but only succeeds in igniting more criticism)

Under the SEC rules, brokers and advisers would continue to be regulated separately.

Brett Redfearn, director of the SEC Division of Trading and Markets, said the bifurcation was required to preserve the brokerage option for investors who want to pay for advice piecemeal rather than with an ongoing fee.

“The transaction-based model needed a different approach,” he said.

Mr. Redfearn highlighted that Reg BI requires brokers to consider the costs of their recommendations as well as reasonably available alternatives.

“It doesn’t mean the lowest-cost option is always the best option, but you certainly need to think about it,” he said. “It suggests that you don’t always default to one specific thing.”

The SEC officials also addressed a frequent criticism of Reg BI: It doesn’t require brokers to recommend the best of reasonably available alternatives. They both said that “best” is a determination that can only be made in hindsight.

Reg BI “is designed to apply to what was happening at the time the recommendation was made,” Mr. Redfearn said.

Ms. Blass added: “How do you examine and enforce for ‘best’?”