The SEC also imported DOL language that requires brokers to “exercise reasonable care and prudence” when evaluating a broker’s transaction for a customer and the series of transactions of which it was a part, Salmon-Smith said.
“By importing some of these same words and concepts, it clouds the degree to which this is suitability-plus or something else,” she added.
To the extent the SEC borrowed from the now defunct DOL fiduciary rule, greater clarification will be needed to clear up confusion, the attorneys agreed.
For instance, Drinker Biddle Partner Fred Reish said that while the SEC has imported the need for broker-dealers to mitigate conflicts of interest from the DOL rule, the concept is not adequately explained. “In discussion, the SEC says firms can mitigate by discharging the same compensation regardless of which product is sold. So if all mutual funds a firm sold charged customers a 3 percent load, and a .25 percent trail, would that work?” asked Reish, playing devil’s advocate.
“Not sure if we can tell from the SEC’s proposal what was intended,” added Reish, who said that firms should pay particular attention to mitigation for compliance purposes. “Under the 40s Act conflicts could be satisfied by disclosure, but by adding mitigation, it is something we haven’t seen before.”
Salmon-Smith said that while it is clear that the SEC is very much not attempting to create a uniform standard for brokers and advisors, “it becomes pretty apparent that there is convergence” between historical broker-dealer suitability concepts, RIA disclosure and fiduciary concepts and the third leg of the stool—the DOL fiduciary rule, she said.
Drinker Biddle predicts that the SEC’s proposal could be finalized and implemented in the next year and a half, though passage could be slowed by the announced exit of Commissioner Michael Piwowar and likely departure of Commissioner Kara Stein in the next year. Finding the votes to pass Reg BI will depend on the support from any new commissioners who are confirmed.