The Good, Bad and Ugly of SEC's Reg BI and Advice-Standards Package

Welcome back to Human Capital. I'm Melanie Waddell in Washington, bringing you the latest on the people shaping the financial services regulatory realm. We're focusing this week on the host of players weighing in — and promising action — on the Securities and Exchange Commission's just-approved Regulation Best Interest and the agency's advice-standards package.

On Wednesday, the agency passed Reg BI by a by a 3-1 vote, along with a new customer relationship summary (Form CRS), fiduciary standards for advisors and a new interpretation of "solely incidental" advice.

Barbara Roper, director of investor protection for the Consumer Federation of America, argues the new rules are "a huge wasted opportunity." Beyond "educating investors to find advisors who are willing to adhere to a higher standard than the SEC rules impose," Roper told Human Capital that the consumer group will be "laying the groundwork for reopening the [Reg BI] rule in a new administration."

But Ed Mills, policy analyst for Raymond James, argues that while a change in administration "could lead to some parts" of Reg BI being reopened, "the existence of the rule will provide the industry with an ability to argue that the [fiduciary] issue has been addressed, likely preventing a large-scale reworking of the rule."

Thanks for tuning in again this week. I'm always reachable at [email protected]. Also, follow me on twitter, @Think_MelanieW.

Keep scrolling for more opinions on the agency's new rules.

While folks are busy sizing up the "good, bad and ugly" of Reg BI, advisors registered with the SEC need to focus on the new Form CRS requirements, advises GJ King, president of RIA in a Box, calling the new form "the first new significant regulatory filing requirement to impact RIA firms in a decade."

King wants RIAs to grasp that the new form will require them to create "a new disclosure document, which will become the firm's primary facing prospect and client disclosure document."

King says Form CRS is a "step in the right direction" but "is less prescriptive than originally proposed and thus may require RIA firms to devote more significant time and resources to ensure they craft the proper plain English language specific to their firm."

(SEC Commissioner Hester Peirce, a Republican, said Wednesday during the open meeting that Form CRS is improved, but still needs work.)

Reg BI, meanwhile, "is more of a mixed bag," opines CFA's Roper. The SEC "made some tweaks" that "move it in the right direction — in particular by including the prohibition on placing the broker's interest ahead of the customer's interest in the rule's compliance safe harbor — but that's more than outweighed by their weakening of the conflict provisions, where conflicts now only have to be mitigated at the individual level, and firm-level conflicts are addressed exclusively through disclosure."

Similarly, Roper continued, "the gain in Reg BI on account monitoring is more than outweighed by the adoption of a new interpretation of brokers' 'solely incidental to' exemption." What does it do? It "gives brokers virtually unlimited ability to market themselves as trusted advisors, and lure investors into thinking they are in long-term relationships of trust and confidence, without appropriately regulating those relationships."

AARP sees the final Reg BI as "alarming," states Cristina Martin Firvida, vice president, financial security & consumer affairs. "Individuals saving for their retirement are more likely to be confused or misled and less likely to receive investment advice that puts their financial interests first. It is hard enough to prepare for retirement, and the new rule has only made it more difficult."

AARP, she said, "is exploring all avenues to protect the retirement savings of its members and all older Americans." A lawsuit afoot, perhaps? It's too early to say, according to AARP.

Does Reg BI preempt state law? Keith Paul Bishop, partner at Allen Matkins, said in a recent legal note that the SEC "decidedly leaves the question undecided." He quotes Reg BI as stating that whether the rule "would have a preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue."

Said Bishop: "Although the lawyers litigating the question of preemption have much to look forward to, the states will undoubtedly be displeased as they had urged the SEC to disavow any attempt to preempt state law."

— Check out SEC's Clayton Explains 'Best Interest' vs. 'Fiduciary' Duty on ThinkAdvisor.

The Good, Bad and Ugly of SEC's Reg BI and Advice-Standards Package

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The Good, Bad and Ugly of SEC's Reg BI and Advice-Standards Package

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