The brokerage industry has thrown its considerable support behind the Securities and Exchange Commission’s Regulation Best Interest proposal, which gives broker-dealers leeway to not only offer widespread advice for the first time, but flexibility to supervise rather than specifically mitigate customer conflicts of interest.
The SEC proposed Reg BI earlier in the year as a way to attempt to clear up investor confusion regarding standards of care between brokers and advisors. Advisors are held to a fiduciary standard, while brokers are held to a suitability standard. The SEC proposal would allow both to use the term “best interest” when describing their services.
“While it is not perfect, we believe that the proposed rulemaking package provides a clear standard of care for financial professionals, including guidelines for managing conflicts of interest, while preserving investor access to the broad range of products and services available in the broker-dealer model,” David T. Bellaire, Executive Vice President & General Counsel of the Financial Services Institute, said in a comment letter to the SEC.
The industry has much to celebrate in the proposal, which would grant broker-dealers the right to offer advice for fees for the first time -- a practice that brokers have long been prohibited by law and court decisions from offering. The industry is also celebrating the fact that brokers would be allowed to sidestep registering as investment advisors and the fiduciary standard that comes with it while only having to consider a customer’s “best interests” at the moment a securities transaction is recommended.
“Rather than imposing the exact same standards on different business models, the proposed rulemaking package draws from key principles underlying the fiduciary obligations that apply to investment advice in other contexts,” Bellaire said. “Further, the SEC specifies that it has given “extensive consideration” to the concept of imposing a uniform fiduciary standard, but declined to do so in favor of “a more tailored approach focusing on enhancements to broker-dealer regulation…build[ing] upon this regulatory regime.”
Rather than more explicit standards of care for disclosing and mitigating conflicts of interest -- such as, for instance, the b-d practice of touting more expensive, more profitable proprietary products that may have inferior investment performance -- FSI instead wants to be able to supervise conflicts and create their own procedures.
“A more realistic approach is to require broker-dealers to adopt written supervisory procedures to detect and manage conflicts of interest, to avoid those they can and take steps to mitigate the impact of those conflicts that can’t be avoided … Like all written supervisory procedures, these should be tailored to the broker-dealer’s business operations,” said Bellaire.
“Specifically, the proposal “would not per se prohibit a broker-dealer from transactions involving conflicts of interest, including for example: receiving commissions or transaction-based compensation, recommending proprietary products, principal transactions, or complex products; but would require such material conflicts to be reasonably disclosed. We agree that not all conflicts can reasonably be eliminated, but they must be appropriately managed,” Bellaire said.
In contrast, the broker-dealer industry wants consumers, regulators and their more strictly regulated competition to trust it has investor best interests in hand. “Some have expressed concern that the proposed Regulation Best Interest does not require broker-dealers to eliminate or mitigate conflicts, merely to have policies and procedures in place,” Bellaire said. “However, we contend that this principles-based approach will allow firms the flexibility to manage conflicts as appropriate to their business model. Industry is innovative and the differences in business models will lead firms to eliminate conflicts that they cannot manage or mitigate,”
The FSI was a co-plaintiff in the successful lawsuit that overturned the DOL fiduciary rule earlier this year. The case turned on the broker-dealer industry’s successful argument that brokers are transactional salespeople who should not be subjected to fiduciary standards. Now, however, the SEC is proposing and FSI is supporting a wide-sweeping rule that would grant brokers the ability to offer advice on a widescale basis.