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.