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Don't Get Too Comfy ... Big Surprises Could be in Store in SEC’s Reg BI, Compliance Specialist Warns

By Rita Raagas De Ramos March 20, 2019

The final version of the SEC’s Regulation Best Interest could still come out looking vastly different from the currently proposed version, according to a compliance specialist.

But a consumer advocate says that would require SEC Chairman Jay Clayton to stand up to the broker-dealer industry.

The pressure for changes to the best interest rule is coming partly in reaction to the fiduciary rule initiatives of various states and partly due to the wide gap between the views of supporters and critics of the pending rule.

At a hearing last week conducted by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the U.S. House of Representatives Financial Services Committee, four out of five witnesses called to testify said having no new rule would be better than the SEC’s proposed Reg BI.

“We predict that the SEC is going to re-propose [Regulation Best Interest] to make it closer to a fiduciary standard because the states have come out [with their own initiatives],” says Todd Cipperman, Philadelphia-based founding principal of Cipperman Compliance Services.

Cipperman's firm provides outsourced chief compliance officers to brokers, advisors, mutual fund issuers and alternative asset managers.

“The states have jumped out ahead of the SEC with their own fiduciary standards, which I think are more stringent than this proposed best interest standard,” Cipperman says. “The states are looking at more of like a Department of Labor-type of fiduciary standard.”

“The SEC tried to mediate a middle ground between the industry and consumer groups, and they didn't do it very well.”
Todd Cipperman
Cipperman Compliance Services

Maryland Senate Bill 786 – The Financial Consumer Protection Act of 2019 – was introduced before the General Assembly of Maryland in February.

The bill holds broker-dealers, broker-dealer agents, insurance providers, investment advisors, federal covered advisors and investment advisor representatives to a fiduciary standard and requires them to “act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice.”

Last year the New Jersey Bureau of Securities proposed a rule that would impose a fiduciary duty on all investment professionals in the Garden State, requiring them to place their clients’ interests above their own when recommending investments.

In 2017, Nevada imposed a statutory fiduciary duty on brokers and advisors who give advice to Nevada-based clients.

Also in 2017, Connecticut passed a bill requiring service providers for 403(b) plans of Connecticut-based public education organizations, some non-profit employers, cooperative hospital service organizations and self-employed ministers not covered by the Employee Retirement Income Security Act of 1974, to disclose conflicts of interest to a plan’s fiduciaries starting January 1, 2019.

I hope SEC Chairman Jay Clayton is willing to stand up to the broker-dealer industry. He has the burden of showing he is serious about changing broker-dealer business practices and meaningfully protecting investors.
Micah Hauptman
Consumer Federation of America

In California, Missouri, South Carolina and South Dakota, brokers are already held by courts to fiduciary standards in varying degrees, according to multiple sources, including a Connecticut legislative research report.

The September 2019 final action date for Reg BI in the Commission’s fall regulatory agenda remains a question mark, according to Cipperman.

“Will September [result in] the final rule or a new proposal? I think you will see a re-proposal,” Cipperman says.

“The SEC has taken a lot of heat [for the proposed Reg BI] from both sides,” Cipperman adds. “I just don't think it serves anyone well. I think the SEC tried to mediate a middle ground between the industry and consumer groups, and they didn't do it very well.”

But Micah Hauptman, Washington, D.C.-based financial services counsel at Consumer Federation of America, isn’t holding his breath.

“While I hope the SEC will take a hard look at and fix the proposal’s many deficiencies, I’m not very optimistic that it will,” Hauptman says.

Clayton and the staffers who crafted the proposed rule “seem pretty proud of themselves for this proposal and have given every indication that they think they got the rule mostly right. This leads me to believe that any changes will be around the edges.”

It’s “truly amazing” that “folks at the SEC are selling this proposal as serious regulation that would reduce brokerage conflicts of interest and enhance investor protections. If that were actually the case, the broker-dealer industry would be up in arms, as they were with the DOL fiduciary rule and not be as enthusiastic as they are,” according to Hauptman.

“I hope Chairman Clayton proves me wrong and is willing to stand up to the broker-dealer industry. He has the burden of showing he is serious about changing broker-dealer business practices and meaningfully protecting investors,” he adds.

To do so would require the SEC to acknowledge that a serious problem exists in this market, “something they’ve been unwilling to do,” Hauptman says. “On the contrary, their instinct is to defend the status quo.”

The SEC has told FA-IQ previously that it would not comment on the content of the proposed Reg BI while it is being finalized.

Meanwhile, the American Securities Association is urging the SEC to finalize its proposed rule “to help increase accountability across the financial industry and better protect America’s retail investors and retirement savers.”

In a statement, ASA says the proposed rule strengthens investor protection by requiring brokers to put their customers' interests ahead of their own; disclose key facts, including fees and compensation related to financial products; exercise diligence, care and skill when making recommendations of investment products; and end high-pressure sales practices.