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SEC Wants to Resolve Conflicts Between Reg BI and State Fiduciary Rules

By Rita Raagas De Ramos March 27, 2019

The SEC is working with states that have fiduciary rule initiatives to avoid conflicts with the final version of the SEC’s Regulation Best Interest, according to Brett Redfearn, director of the regulator’s Division of Trading and Markets.

“We’re taking in a lot of inputs from the states. We’re communicating with them as much as possible. We’re looking for the best possible way of resolving this so there aren’t those sorts of conflicts,” Redfearn said Tuesday during a regulatory panel discussion at the Sifma Compliance and Legal Seminar in Phoenix, Ariz.

Redfearn didn’t elaborate on the content and progress of those communications.

When asked about the progress of the SEC’s proposed Reg BI and whether the regulator remains open to feedback and comments from others, Redfearn replied: “Hopefully, we’re wrapping up.”

Redfearn reiterated that the pending Reg BI is a “very high priority” for the regulator because it will “heighten the broker-dealer standard of conduct.”

The SEC had two goals in crafting the proposed rule, which also guides them in the finalization of the rule, according to Redfearn.

One is to enhance the quality of a broker-dealer’s recommendation by reducing the potential harm that could result from conflicts. The second is to preserve the broker-dealers’ pay-as-you-go model, “which is extremely important,” he said.

Redfearn acknowledged there has been “a lot of talk” about the fiduciary standard concept in relation to the pending Reg BI, which doesn’t explicitly require brokers to act as fiduciaries.

However, despite the difference in terminology, Redfearn said “there are common fiduciary principles that are the basis behind what we’re doing also for broker-dealers and Reg BI.”

Redfearn said what the SEC has done is “tailor the fiduciary obligations” with the kind of relationships brokers have with their clients, “in particular, the transaction-based advice.”

Maryland, New Jersey, Nevada and Connecticut are among the states that have set forth on their own fiduciary rule initiatives after the Department of Labor’s fiduciary rule was vacated in Federal court last year.

Meanwhile, at the same panel discussion, Finra chief legal officer Robert Colby said there is “a lot” of overlap between the self-regulator’s suitability rules and the SEC’s pending Reg BI.

Colby echoed the comments previously made by Finra president and CEO Robert Cook about the fate of the suitability rules.

“If Reg BI is adopted, we would look at our rules to see if changes are appropriate,” Cook said at Sifma’s annual meeting in Washington, D.C. in October. “Do we still need the suitability rule?


The questions about the suitability rule remains, Colby said. “Should we keep it?” he asked. “Do we still need a lot of the rules?”

Commenting in general terms, Richard Walker, a partner at law firm King & Spaulding, said the problem with overlapping and fragmented regulations is the costs and efforts involved in trying to achieve compliance “multiply significantly.”

Without giving more context, Merri Jo Gillette, deputy general counsel at Edward Jones, gave the example of once receiving a “voluminous document request” from the SEC, only to get the same request from Finra around six to 10 months later.