Here's What Experts Think is Contentious About the SEC's Best Interest Regs
Source: FAIQ, May. 31, 2019
MRINALINI KRISHNA, REPORTER, FA-IQ: While the SEC’s proposed Regulation Best Interest regulation seems to find more favor with industry players than the preceding DOL fiduciary rule, there still are a few contentious issues being debated.
One big question is: Should the word fiduciary be included in Regulation Best Interest?
SEC lawyer Lourdes Gonzalez, at a recent Finra conference, said fiduciaries aren’t necessarily free from conflict. She questioned which definition of the word would be applicable, considering there are fiduciary obligations under different laws -- such as the Employee Retirement Income Security Act of 1974, the Investment Advisers Act of 1940 and even the trust law. Gonzalez said she was sharing her own opinion and not those of the SEC.
But there are others in the industry who disagree.
TODD CIPPERMAN, FOUNDING PRINCIPAL, CIPPERMAN COMPLIANCE SERVICES: There’s no doubt in my mind as a lawyer that the fiduciary interest is a higher standard of care than a suitability interest. I think the statement that nothing is conflict free -- that’s right. That’s almost right. You’re taking fees, [so] there’s an inherent conflict of interest. I’m taking fees from you as a client, presumably. But the fiduciary standard ensures that there’s fully full disclosure of those conflicts and outright bans certain of those conflicts. And I think the big difference is the ongoing obligation. The fiduciary standard requires a certain ongoing relationship that we have ongoing to make sure it’s always in the best interest of clients on a full-time basis, whereas the suitability center really stops at point of sale. I think it’s a huge difference.
MRINALINI KRISHNA: The next question is: Will Regulation Best Interest increase the compliance burden?
Most experts feel while there may be some additional requirements, firms might have a head start in trying to become compliant if they were already prepared for the now defunct DOL rule.
FRANCOIS COOKE, MANAGING DIRECTOR BROKER-DEALER PRACTICE, ACA COMPLIANCE GROUP: I think what firms are doing is based on the Department of Labor’s fiduciary requirement that came out and then was rescinded. There’s been a whole exercise that the industry has gone through. Number one is to look at the products they offer, to make sure that it’s priced, cost-suitable, for clients. And then secondarily is how firms compensate their representatives to make sure it’s fair and reasonable. So, I think the industry’s already gone through that process. And hopefully, when the SEC comes out with their guidance requirements, the industry hopefully will already be prepared.
MRINALINI KRISHNA: But that’s not the only cloud hanging over this regulation.
Once the DOL Fiduciary rule was vacated, several states began proposing their own fiduciary standards – including Nevada, New Jersey, New York, Massachusetts and Connecticut. A similar proposal was voted down in Maryland in April.
Different standards for different states could pose significant challenges to industry participants.
MARK QUINN, DIRECTOR OF REGULATORY AFFAIRS, CETERA FINANCIAL: The first one is what I would call scope and duration of the fiduciary obligation. Under normal circumstances, under current law, a broker-dealer has an obligation to the client that terminates upon the recommendation or purchase or sale transaction. The tack that the state rules would take would be in many cases to extend that obligation past the time of the transaction. So that would take a tremendous amount of adjustment in the processes that broker-dealers have, and also require us to revisit our economic arrangements with clients.
The other comes to what I would call qualitative factors about -- for example, New Jersey has a requirement that a given recommendation be the best of all the reasonably available alternatives. I think the problem that the industry is having with that now is we don’t really know what that means? Does it mean cheapest? Does it mean cheapest plus something else? Does it mean best combination of factors? And, you know, any time you have a standard that’s relatively imprecise like that it's going to take a lot of work for us to adjust to and implement.
FRANCOIS COOKE: When there are very specific state requirements, it means that there may have to be additional personnel. And if there are additional processes and procedures, they will have to be implemented to deal with different requirements. Potentially, what firms may do is to look at the requirements that are most stringent and default to the more stringent requirements.
MRINALINI KRISHNA: That could translate into a higher cost of doing business. Firms such as Morgan Stanley and Wells Fargo threatened to pull out from the state of Nevada. And they may not be the only firms evaluating their options.
MARK QUINN: Ceasing to offer services in the state is a huge decision for any firm that is national in scope and a couple of the ones that said that are truly national in scope -- they're global firms. I have to assume that if they said it, they meant it, and they had done the analysis and concluded that they could not operate profitably in that environment. And, you know, we’re kind of going through the same appraisal process. The problem that we have now is we don’t know exactly what the regulations will look like in their final form, and it’s difficult to forecast what we might do until we see that. I do know that if it goes the direction that it is, it will require such significant adjustments that there might be places in smaller states -- you know, for example, Nevada -- a lot of firms don’t have a lot of presence in Nevada, and they might say it isn’t worth making the adjustments that we have to make.
MRINALINI KRISHNA: That was perhaps one reason the industry got behind Regulation Best Interest and urged the SEC to pre-empt state rules.
So, would Regulation Best Interest be a big win for the broker-deal industry?
TODD CIPPERMAN: I think the SEC is going to be forced to come up with a rule that everybody is at least mildly disappointed, if not happy with, because they can’t have a situation where it goes to all the states and have some sort of least common denominator. So I think the SEC’s going to be forced into some sort of universal rule, and at some level it is going to have to preempt the state rules, because otherwise it’s not a workable solution.