The SEC is considering issuing three bulletins that would detail agency expectations regarding Regulation Best Interest, SEC Chairman Gary Gensler said at the North American Securities Administrators Association (NASAA) conference today.

The guidance would take a deeper dive into how SEC staff expects registered investment advisors and broker-dealers to handle Reg BI’s requirements in the areas of mitigating conflicts of interests, the consideration of reasonably available investment alternatives and the analysis of risks and costs.

Under Reg BI, when a broker or an advisor provides advice, digitally or otherwise, they must act in the best interests of their clients, and not place their own interests ahead of their clients’ interests, Gensler said.

“These words matter to investors. They should have meaning for brokers and advisors as well. Thus, I’ve asked our divisions of investment management, trading and markets, examinations and enforcement to help ensure that investment professionals live up to these obligations,” Gensler said.

The SEC published a bulletin in March that addressed account recommendations, including rollover recommendations, and focused on three core points that the new staff bulletins may illuminate further, he added.

Brokers and advisors “need to prevent their own interests from inappropriately influencing their recommendations and advice," Gensler said. "If they can’t do that, they have decisions to make—eliminate the conflict, don’t give the advice or find some other way to ensure that they don’t put their interests ahead of the retail investor’s interests."

Lengthy disclosure documents won’t be enough to clear the requirements of Reg BI, both Gensler and NASAA President Melanie Senter Lubin said at the conference.

NASAA sweep exam reports in the past year cited instances where firms were using 60-pages or more of disclosure as their sole response to their duty to mitigate or eliminate conflicts, such as revenue-sharing payments the firm may receive from a product manufacturer to steer investor recommendations the manufacturer’s way.

“You can’t disclose away conflicts,” Gensler said. “I took away from NASAA’s report there is still work to be done.”

NASAA’s most recent report found that many firms still place their financial interests ahead of their customers, despite implementation of Reg BI.

Lubin, who conducted a Q&A session with Gensler after his speech, asked Gensler if he has “any ideas about how disclosure can be better? What should firms be doing to mitigate concerns? The advice has to be untainted from any conflicts, including revenue sharing."

“I keep coming back to first principals," Gensler responded. "Whether it’s broker-dealers or RIAs, these duties really do matter [and should include] putting client interests first and not to think a 60-page disclosure will disclose away conflict. There is still an inherent conflict.”

Gensler also said that SEC wants to see that securities professionals have considered reasonably available alternative investments before making investor recommendations that can be considered in the best interest of clients. “This needs to be a meaningful evaluation,” he said.

Brokers and advisors also need to consider costs and risks to investors, he said. “While it is true that they don’t always have to recommend the lowest-cost option, they must have a reasonable basis to believe a higher-cost recommendation nonetheless is in the investor’s best interests,” he said.

“Brokers and advisers have a critical role to play in all of this. ... Firms need to take investor protection and compliance obligations seriously, reining in or curing any conflicts and really delivering the best-interest advice that investors so need and deserve,” Gensler concluded.

With the explosion of robo-advisors, Lubin said that NASAA doesn’t share the view that it doesn’t matter if investment advice comes from person or algorithm.
Gensler said he also believes the SEC needs to be technology neutral, but not technology naïve. 

Take for instance “separately managed accounts. The price has come down, and there’s lots of competition, which is good, but what’s behind the algorithms? Is someone steered one way or another because optimization is steering them based on the firm’s revenue,” Gensler asked.