The first order of business for the SEC will be to focus on broker-dealer and hybrid firms to make sure it is clear the services being provided by brokers live up to Reg BI. But once that is figured out, Galletto said, he believes regulators will use the new package of rules on RIAs, too.
“I anticipate the SEC will use Reg BI to build higher expectations and standards in general but also as a disciplinary tool and catch-all that regulators can direct against firms for whatever the hot button of the year happens to be,” he said.
While Reg BI was created ostensibly so that investors understand the different services, fees and level of loyalty that brokers and RIAs offer, at the end of the day only advisors have been and remain fiduciaries. Brokers and dually-registered advisors were not made fiduciaries.
“On the investment advisor side [at the SEC] there seems to be a general distrust that investment advisors are actually meeting with clients, creating a plan and building a portfolio, so how dare they take that percentage point?” Galletto worried.
Elections in 2020 could also change how Reg BI is applied, he said.
“I don’t know what the outcome of the upcoming election will be, but depending on who is sitting in the Oval Office and whether Senate or House seats flip, this regulation could become the foundation piece for a heightened duty and more enforcement teeth,” Galletto said.
States that are pushing individual fiduciary regulations and legislation are also a concern for RIAs, he said.
“We have clients who are residents in multiple states, so the more layers of regulation there are, the more layers we have to peel back, the more likely we are to upset a state regulator to be functional,” he said.
“It’s one of my bigger complaints that we can’t get a unified rule,” Galletto added.
As for firms’ threats that they’ll pull out of states like Nevada if they implement tougher fiduciary standards for brokers, Galletto said, it is more likely most companies will at least take steps to comply “until there is blood in the water” from enforcement of a state rule, before making a decision about whether to leave or stay and possibly sue.