Two Securities and Exchange Commission members said Friday that the potency of a new broker investment advice standard will depend on how it is enforced.
Last June, the agency
approved an advice reform package that centers on
Regulation Best Interest, which is designed to raise broker requirements above suitability. But the measure does not define what is meant by acting in a client's best interest nor does it outline how brokers should mitigate conflicts.
That is why the steps the agency takes following the June 30 implementation date are crucial, said
SEC Commissioner Allison Herren Lee.
"These early interpretations and these early potential enforcement attempts are going to shape it," Ms. Lee said at the Consumer Federation of America's Financial Services Conference in Washington. "There are opportunities to make it strong, and we have to seize them early."
SEC member Robert Jackson Jr., who appeared with Ms. Lee at the event, agreed that guidance and enforcement will influence the evolution of Reg BI, as it's called.
"These little decisions make all the difference," Mr. Jackson said. "There's still a lot of work that can be done."
It's difficult to predict when the first enforcement cases will come down, Ms. Lee told reporters on the sidelines of the conference. She anticipates the SEC first will provide guidance to financial firms on how to comply with Reg BI before bringing the hammer down on them.
Recently, the agency
released frequently asked questions about the disclosure form contained in the advice reform regulatory package.
Ms. Lee and Mr. Jackson are the two Democratic appointments to the five-member commission, whose three other members were chosen by Republicans. Mr. Jackson was the
sole vote against Reg BI on June 5. Ms. Lee had not yet been confirmed by the Senate when the panel approved the measure.
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Mr. Jackson told reporters that the SEC's approach to enforcing Reg BI could depend on which party is in the majority.
"I predict that that kind of implementation set of decisions would be completely different, with leadership more focused on protecting individual investors than they might be in a Republican administration," he said. "How good a job Reg BI is going to do in protecting ordinary people is going to be decided by on-the-ground regulatory decisions in the future, and who's making those decisions is going to be very important. The way this unfolds is going to depend on the SEC's leadership. Those who share my concern that the rule is too weak are likely going to push it to its limits and those who don't aren't, and that's going to matter."
Mr. Jackson said that Reg BI is not set in stone but could be changed by a future SEC. The majority on the panel would switch to Democratic in a Democratic presidential administration.
Investor advocates such as Barbara Roper, CFA director of investor protection and a prominent Reg BI critic, also could change the course of Reg BI, Mr. Jackson said.
"What it means and how long it lasts depends very much on what the people in this room, what folks at CFA like Barb [Roper] and Micah [Hauptman] do over the next 12 or 18 or 24 months," he said.
The primary problem with Reg BI is that it doesn't clearly emphasize the primacy of investor protection, Mr. Jackson said. The measure says brokers cannot put their interests ahead of an investor's interests.
"The investors should come first," he said. "Instead, we came up with this muddled, undefined standard that allows brokers to let their interests compete with those [of the] people they work for. We're going to regret that. In the future, the SEC will have to fix it."
Ms. Lee indicated she would have voted against Reg BI.
"It is not the rule I would have written," she said.
