The Securities and Exchange Commission’s conduct proposal for brokers is already motivating broker-dealers to identify and begin eliminating conflicts of interests, SEC officials and industry executives said at Finra's annual conference in Thursday.

The proposal, known as Regulation Best Interest, “is a big leap over where we are today,” Lourdes Gonzalez, assistant chief counsel for sales practices in the SEC's Division of Trading and Markets, told hundreds of industry executives in Washington, D.C.

“The big leap forward for us is making broker’s requirement to act in the customer’s best interest explicit in the rule. So the broker would have to act in the customer’s best interest and the broker would not be able to put its interest ahead of the customers' interest,” Gonzalez said.

Beyond a broadened disclosure requirement and the best interest component of the rule, “the broker would also have to mitigate conflicts. Essentially, 'mitigate' means reduce conflicts that stem from financial incentives. And frankly, most conflicts are conflicts stemming from financial incentives,” Gonzalez said.

While Gonzalex admitted the SEC drew from the Finra's suitability requirement when drawing up the best-interest proposal, she said the agency took the best from the now-defunct Department of Labor fiduciary rule, too, and added a number of enhancements to toughen the standard.

There were many reasons the agency did not call the proposal a fiduciary standard, she said. “I’ve done a lot of research with regard to fiduciary obligations," she said. "Reg BI seems to go a lot farther than the fiduciary obligation on the investment advisor side. It goes beyond disclosure, but also requires brokers to mitigate conflicts and focus on costs.”

“You’re damned if you do and damned if you don’t,” Gonzalez said. “If we called it fiduciary, some would ask why are you calling it fiduciary?”

“Customers don’t know what fiduciary is,” she added.

Michelle Oroschakoff, chief risk officer at LPL Financia, who also spoke on the Finra panel, said LPL is already preparing for the SEC's best-interest rule.

“One of the things that’s important is that with the requirement to put the customer’s interest first, every individual firm has to think about how they’ll do that and every firm will have to think about how they’ll mitigate conflicts because different firms will have different sets of conflicts depending on their business models,” Oroschakoff said.

While it is “impossible” to gear up entirely without knowing what the SEC’s final rule will look like, “we are levering a lot of what we did with the DOL rule. We looked at [our] entire lineup of products and reduced and aligned pricing a little more tightly and will continue to do that,” Oroschakoff added.

The firm is also focusing on disclosure with respect to its entire line up of products and how to best document and disclose conflicts that may cost investors, she said, including drilling down into the direct and indirect compensation that reps and financial advisors are paid.

“Suitability means it’s reasonable for you given your investment goals and objectives,” said Oroschakoff, formerly a securities attorney who defended firms against suitability claims. “It doesn’t have to be the best solution, it doesn’t have to be the cheapest solution, it just has to be appropriate for you.

“And that’s a lower standard than best interest,” she argued.

“I know that there has been commentary that says that this is no more than suitability. I don’t agree with that. I think putting customers' best interest first and the associated disclosure obligations are a much higher standard to the customer than the existing suitability standard,” Oroschaff added.

“The thing about having a best interest standard is that it is clear to customer what you’re duty is. Customer do not come to you understanding what suitability is. They will understand best interest. It will address customer confusion,” she continued.

While firms work to eliminate conflicts, Gonzalez said that it was important to her as she helped write Reg BI to preserve commissioned-based brokerage account offerings, which she said the industry began eliminating in response to the DOL rule to the disadvantage of smaller, buy-and-hold investors.

“What we’re trying to do is raise the standard of care that brokers have with respect to when they make recommendations to customers and at the same time find a way to preserve the broker advice model,” she said.

“Oftentimes, and I think this often gets lost in the conversation, it is the cheapest option for investors, particularly long-term, buy-and-hold investors. If you’re investing for retirement, you’re better off just paying a commission one time than paying 1 to 2 percent every year forever on that product,” she said.

Gonzalez also contended that fee-only registered investment advisors who are fiduciaries are not without conflicts. “I think it’s wrong when people say fiduciaries have no conflicts,” she said. To that end, the SEC has also proposed an ancillary rule that would codify all existing regulation for RIAs as part of the Reg BI package.