Why SEC’s New Reg BI Could Bring More Legal Challenges from Clients
One of Sutter Securities CEO Robert Muh’s concerns about the SEC’s proposed Regulation Best Interest is the potential for more legal and arbitration challenges from broker-dealer industry clients who will likely complain that their brokers didn’t work in their best interest.
Muh noted that Finra member firms employ around 650,000 registered representatives, and there are bound to be some who will fall short of working in the best interest of their clients.
“Regulation Best Interest expects everybody 100% to deliver” advice that is in the best interest of the client, Muh said Friday at Finra’s annual conference in Washington, D.C.
Muh believes that’s an unreasonable expectation. What would help is more front-end guidance from the SEC on what it would consider compliant or non-compliant with its proposed Reg BI.
The SEC’s proposed Reg BI — which is in the final stages of rulemaking — establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form aimed at clearly stating to clients if they are dealing with a broker-dealer or an investment advisor.
Muh said he is “hoping” for specifics so portfolio recommendations could be “judged” at the firm level on “whether it is best interest or not.”
Without such guidance, Muh says he wonders, “How many people will go to arbitration?”
“My concern is the lowest-cost product will be considered Reg BI-compliant. I don’t agree with that. But I don’t think it will be easy to convince people that there are other factors to look at [aside from cost] to show best interest [compliance],” Muh added.
Muh believes investment performance will end up being the de facto basis of clients to pursue legal action or go into arbitration. He predicts that these actions will start coming around a year after Reg BI is implemented because by then, clients would already have one-year performance records to cite.
Small firms — those with 150 or fewer registered representatives — will likely suffer more from legal or arbitration actions from clients related to investment performance and Reg BI, according to Muh.
Muh said in 2009, following the global financial crisis when capital markets tanked, more than 7,000 cases were filed against small firms. He didn’t elaborate where those cases were filed.
In contrast, in 2018, when the S&P 500 index was up by double digits, 4,000 cases were filed against small firms.
Muh didn’t present any evidence that the stock market performance was directly correlated to the cases filed, but said that based on his experience in the industry, more investors complain when they are losing money.