SEC Reg BI Must Include Rollovers: Morningstar

The Morningstar comment letter notes that flows into mutual funds paying unusually high excess loads declined after the Labor Department proposed its fiduciary rule in 2015 – a shift that Szapiro states was "statistically significant."

The reduction "in the distortionary effect of conflicted payments suggests that firms put in place effective policies and procedures to mitigate conflicts of interest in response to the DOL rule and, further, that the SEC's proposal could maintain this important momentum," he wrote.

In its fiduciary rule, Labor's economic analysis focused on the harms to consumers from advisors' conflicts of interest focused on load-sharing, Szapiro explained.

"Load-sharing payments flow from asset managers to intermediaries that sell funds, creating a conflict by giving intermediaries an incentive to sell products for which they collect a higher payment rather than products in the best interest of an investor, all other things equal," he wrote.

To sustain this reduction in load sharing payments, Szapiro told ThinkAdvisor in  separate comments that Reg BI "needs a clear requirement to ensure rollover recommendations are in an investors' best interest," as well as "disclosure not only that financial institutions have a conflict of interest but also how a financial institution mitigates the conflict."

Also needed are "additional specific disclosures on revenue-sharing, load-sharing and other potential conflicts of interest. All that said, the way the proposed regulation is written, a lot of its effectiveness will also come down to future SEC decisions on when and how to enforce the regulation."

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• Indie BDs Warn SEC of Major Flaw in Conduct Rules
• O' No! Ken Fisher Tells SEC to Ban Use of 'Advisor
• SEC Reg BI Stricter Than Fiduciary, Will Cause Brokers to Flee: Peirce