Stifel CEO Praises SEC Reg BI, Blasts House Vote

First of all, Reg BI doesn't apply to RIAs. They work under the Investment Advisers Act. Reg BI [addresses] accounts under the 1934 Act. But Reg BI benefits all because it raises the conduct standard for brokerage accounts so they're as high as, and in many cases higher than, the standard for RIAs.

How so?

Under Reg BI, you must make full and fair disclosure. And not only do you have to disclose [conflicts], you also have policies and procedures to mitigate or even eliminate them. That's the higher standard. In an advisory, you can disclose away a conflict. I'm speaking from experience because I have advisory accounts [in my firm]. The disclosure requirement regarding conflicts is a higher standard under Reg BI than it is under the 1940 [Investment Advisers] Act.

In a letter on Aug.7, 2018, to SEC chair Jay Clayton, you wrote that you were in favor of a standard of care that is "essentially uniform across brokerage and advisory service models." Now that Reg BI has been adopted, how does it stack up?

Regulation Best Interest imposes a standard of care and loyalty that I was recommending. And then they went even further by enhancing the disclosures: you need to mitigate or eliminate. They also added the word "skill," which you have to have when making a recommendation.  That said, I think it's going to be costly to implement, especially [because of] the [required] Form CRS Client Relationship Summary [for disclosures]. But in the end, [Reg BI] will be beneficial to consumers and the industry alike.

Is the standard of care indicated in Reg BI a fiduciary standard?

Well, let's not get caught up in terms. The term fiduciary means different things in different contexts, and I think this is one of the confusing aspects [to consumers] of this rule. For example, an ERISA fiduciary in my firm has different requirements than an investment advisor's fiduciary duty under the '40 Act.

Please comment on how the issue of fiduciary is treated in Reg BI as compared to that of RIAs.

It's very important to note that Reg BI applies the same fiduciary principles to the brokerage model: a duty of loyalty — a duty to act in the best interest of the customer, to not place a broker's interest ahead of the customer. Likewise, Reg BI has a duty of care — to act with diligence, care and skill in making an investment recommendation.

So consumers are gaining with Reg BI?

Well, sure. First of all, they're able to maintain choice to [obtain] brokerage advice, which is often less expensive than fee-based accounts. But they also gain the benefit of an enhanced standard from the brokerage model. I expect it will result in consumers receiving better financial advice that's aligned with their interest.

What are your thoughts about the states proposing their own rules, as have New Jersey, Massachusetts and Nevada?

State regulations create patchwork regulation, which isn't good for our markets in general, not only securities markets.  So we have to be careful that we don't begin to impose different requirements at the state level, which could potentially disrupt national markets. I also believe that the SEC, who has been charged [with] being the regulator of our national markets, should be allowed to do their job.

Do you think that FAs and RIAs will bring up the subject of Reg BI with clients?  

I know they will. It will be a little confusing [to consumers] at first; but in the long run, it's a good thing for the client relationship because it explains the differences between brokers and advisors, whether or not you offer both, benefits and, maybe, the cost of [each]. That's one of the great things that came out of Reg BI: helping to educate consumers.

Does Reg BI have any shortcomings?

Given the difficult task and the balances that are struck, Regulation BI is a good rule.

Is anything missing from it?

No. It's a principles-based rule that has 800 pages of explanation. I think it's pretty comprehensive. It applies the principles of loyalty and care to the brokerage model. Consumers should know that whichever model they choose, they'll have those same standards: The industry will place the client's interest first.

— Related on ThinkAdvisor:

• SEC Reg BI Involves 'Massive Implementation' Process: Peirce
• Ron Rhoades: SEC Reg BI Is 'Greatest Securities Fraud in History'
• SEC's Clayton Explains 'Best Interest' vs. 'Fiduciary' Duty