New guidance from the Securities and Exchange Commission warns firms that identifying and addressing conflicts under Regulation Best Interest and the Advisers Act fiduciary standard "should not be merely a 'check-the-box' exercise, but a robust, ongoing process that is tailored to each conflict."
In its new guidance, released Wednesday morning in Q&A form, SEC staff notes that it's "important that firms and their financial professionals review their business models and relationships with investors to address conflicts of interest specific to them."
Industry sources I contacted see the bulletin as helping brokers and advisors figure out "how" to identify and address conflicts.
This is the second set of Reg BI-related guidance issued by the Commission. The first was released in March and addressed account recommendations — such as rollovers.
The agency expects to release further guidance on broker and advisor care obligations, which would include consideration of reasonably available alternatives as well as costs and risks.
"This is one of the first substantive pieces of guidance on Reg BI for the brokerage industry and the fiduciary standard for investment advisers" under SEC Chairman Gary Gensler, Jim Lundy, a partner and member of the Securities Enforcement & Litigation Practice at Foley & Lardner LLP, said in an email. "As such, brokerage and investment advisory firms should give this a close study and apply it to their business model and compliance and supervision programs as they best see fit to do so."
The FAQ, Lundy added, "may be viewed as helpful in that it provides much greater detail and guidance for the 'how' aspect of getting into and maintaining compliance with these standards."
Micah Hauptman, director of investor protection for the Consumer Federation of America, agreed in another email that the guidance "will be helpful to firms and financial professionals as they consider how best to address different conflicts in their business models."
The guidance, Hauptman said, "is consistent with what Chair Gensler has promised, to provide additional clarity about what Reg BI and the Advisers Act fiduciary duty require and to make the most out of them. We welcome it."
The bulletin "makes clear that firms should not approach conflicts of interest as a 'box-checking' exercise and that how firms address various conflicts will depend on the nature and extent of those conflicts," Hauptman added.
Further, he continued, "it makes clear that there are some conflicts that are of a nature and extent that firms would be unable to address in a way that would allow the firm or its financial professionals to provide advice or recommendations that are in the retail investor's best interest. In those cases, firms would need to take much more aggressive action in addressing those conflicts, including eliminating them or refraining from providing advice or recommendations that could be influenced by the conflicts to avoid violating the obligation to act in the retail investor's best interest."
'Conflation' of Reg BI and Fiduciary Standard?
The guidance "seems designed to point out the similarities between Reg BI and the fiduciary standard rather than to point out the differences," Nicolas Morgan, a partner at Paul Hastings, said in another email.
