SEC effort to give Reg BI more teeth has yet to bite

Securities and Exchange Commission Chairman Gary Gensler told lawmakers last year that the agency would work to ensure Regulation Best Interest lives up to its name.

The broker standard of conduct was approved and implemented under previous SEC Chairman Jay Clayton and the agency’s Republican majority. With Gensler in charge, the agency now has a Democratic majority.

Although many Democrats and investor advocates criticized Reg BI as being too weak to curb brokers’ conflicts of interest, Gensler has kept Reg BI in place.

Instead of ripping it and starting over, he said in congressional testimony last fall that the agency would use guidance and enforcement to make sure investors are getting a best interest standard of care.

After more than a year in office, Gensler hasn’t yet put new teeth in Reg BI. The agency has brought enforcement cases involving financial firms’ deficiencies on Form CRS — the customer relationship summary that was part of the Reg BI regulatory package.

But the Form CRS cases are seen as low-hanging fruit. It’s not clear when the SEC will announce its first major enforcement action regarding recommendations brokers make to customers, the substantive heart of the regulation.

The SEC has posted guidance on Form CRS, telling firms to drop jargon and be more accurate in the document. Earlier this year, the agency released a staff bulletin on how financial advisers should approach account-opening recommendations under Reg BI, emphasizing that they must consider costs.

NO PATIENCE

Some investor advocates are getting impatient with the SEC’s pace on revisiting Reg BI.

“There’s still a ways to go as far as providing guidance, and the SEC needs to start enforcing the rule,” said Micah Hauptman, director of investor protection at the Consumer Federation of America.

Knut Rostad, president of the Institute for the Fiduciary Standard, said he was expecting a stark difference in how the SEC handled Reg BI under Gensler compared to Clayton.

“I am surprised,” Rostad said. “So far, we haven’t seen that. But we realize we’re just finishing the first quarter of a four-quarter game.”

Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the guidance, frequently asked questions and other material the SEC and the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, have generated about Reg BI demonstrates their commitment to it.

“It’s quite a body of work,” Carroll said. “It shows the time, energy and resources the SEC and Finra are putting into Regulation Best Interest to make sure it’s a success.”

But what the SEC sees as success is still a question. The regulation is principles-based. It doesn’t specify, for instance, how financial firms must mitigate conflicts of interest and doesn’t spell out how they must assess reasonably available alternatives when making customer recommendations.

“It may be helpful for the SEC to give more guidance about what their expectations are,” said Mark Quinn, director of regulatory affairs at Cetera Financial Group.

When Barbara Roper, a longtime investor advocate and Hauptman’s predecessor at CFA, joined Gensler’s senior staff last August, expectations rose that a tougher Reg BI was on the way. So far, it hasn’t arrived.

“It’s a huge and unwieldy institution,” Hauptman said of the SEC, where he was recently counsel to SEC Commissioner Caroline Crenshaw. “No one person can right the ship overnight. [Gensler’s] regulatory agenda is ambitious, and there are only so many fights you can pick.”

But the agency can still put more bite into Reg BI.

“The SEC has all the authority it needs to ensure that financial professionals provide recommendations in their customers’ best interests, it just needs the will to enforce its rules,” Hauptman said.

The SEC is on the right track with Reg BI, Carroll said.

“To the extent you leave it principles-based and grow through guidance and examination, we’ll end up in a pretty good place,” he said.

Related Topics: Gary Gensler, Knut Rostad, Securities and Exchange Commission