SEC member Crenshaw says agency should provide guidance on Reg BI

Democratic commissioner says the SEC should define ‘best interest,’ clarify conflict mitigation related to Reg BI

Securities and Exchange Commission member Caroline Crenshaw said Thursday she wants to understand how the new broker investment advice standard is working before revising the rule but also indicated guidance will be needed to clarify key parts of it.

The SEC, the Financial Industry Regulatory Authority Inc. and state regulators should collect data about Regulation Best Interest, Crenshaw said at a Consumer Federation of America online conference.

She said regulators should assess how Reg BI is being implemented and whether brokerages are changing their policies and procedures, curbing conflicts of interest and making portfolio recommendations that meet investors’ objectives.

“I think we need to start with an understanding of what, if any, impact Regulation Best Interest is having on market practices and investor outcomes,’ Crenshaw said. “With those results, we can more effectively plan next steps. We need data to answer those questions. Whatever the outcome, I think we will likely need to issue guidance in this area.”

Crenshaw stopped her answer there, which prompted a nudge from the moderator of the conference session, Barbara Roper, director of investor protection at the Consumer Federation of America.

“There are two areas where we really don’t need to wait,” Roper said. “One would be in defining ‘best interest’ and another would be in providing greater clarity around how the commission interprets the requirement in the rule to mitigate conflicts of interest. If we can clarify the meanings of those terms and the commission can start to enforce to those sort of standards, then you have the capacity to get some real benefits out of the rule.”

Crenshaw said she and Roper are on the same page.

“I stopped short. What I didn’t go into is that I completely agree,” Crenshaw said. “The areas of potential guidance that are forefront for me are the areas you just mentioned. What does ‘best interest’ mean? And what is appropriate conflict mitigation? Those are questions I am thinking about.”

Reg BI went into force on June 30. The financial industry backs the rule, which SEC Chairman Jay Clayton says is tougher than brokers’ previous suitability standard.

Earlier this week, Kenneth E. Bentsen Jr., chief executive of the Securities Industry and Financial Markets Association, said the next SEC, which will have a Democratic majority during the Biden administration, should wait to see how Reg BI performs before revisiting it.

Crenshaw said she backs investor testing of Form CRS, the new customer relationship disclosure requirement attached to Reg BI.

“I want to understand whether investors are getting the information that is actually in their best interest,” she said.

She also stated a broader principle that likely resonates with Democrats and investor protection advocates, who back the fiduciary standard that continues to govern investment advisers over Reg BI.

“I think a strong fiduciary standard of conduct that clearly requires investors to come first is critical,’ Crenshaw said. “And that should be true whether an investor is working with their broker or their investment adviser.”