Reg BI Is a 'Work in Progress': SEC Chief

Regulation Best Interest is "a work in progress," Gary Gensler, chairman of the Securities and Exchange Commission, said Tuesday.

During a question-and-answer session at the Financial Industry Regulatory Authority's annual conference in Washington, Robert Cook, FINRA's CEO, asked Gensler if Reg BI and the standard of conduct for investment advisors has been "successful," and also asked Gensler to provide some highlights on the SEC staff bulletins on Reg BI.

"The clients' interest comes first," Gensler responded. "Regulation Best Interest and the associated guidance on fiduciary duty at its core, that's what it's about. How successful it is: that's a work in progress. It's about FINRA's examination of broker-dealers, of course, it's oversight of the markets, but ultimately it's about those individual broker-dealers, investment advisors, ensuring that they put their clients' best interest" first.

The SEC staff bulletin is "really about the core of that concept — this is not meant to be just a check-the-box exercise. That it's more than just suitability with some new wrapper. That means really looking at account openings, looking at costs, looking at reasonable alternatives — that's what the staff bulletins were trying to answer."

On Friday, FINRA expelled a firm for Reg BI-related violations.

Next Steps

Cook asked Gensler if any further guidance can be expected. "There's not staff work on further guidance but it's ongoing work on industry itself, FINRA the SEC, and as things come up we'll try to address that," Gensler responded.

Separately, Gensler continued, "I've asked staff to consider recommendations to the Commission with regard to the conflicts that might arise in predictive analytics."

If the algorithm behind artificial intelligence is "optimizing on a customer's best interest and it's about their interest, it can bring great efficiencies and access to the markets," Gensler said. "But if it's also optimizing — multiple factors can be in these optimization functions — on the interest also of the robo-advisor, optimizing also on the interest of the brokerage app, therein lies the conflict."

Gensler said he hoped the staff would offer recommendations on how to address this conflict and put a rule out for public comment.

Off-Channel Communications

Cook also asked Gensler how the industry should navigate the SEC's probe of off-channel communications — like WhatsApp messages and texts.

"The SEC has, at its core a set of books and records obligations, the industry has it, as mandated by Congress," Gensler explained. "At its core, it's so that senior management can actually control their firms, the customer interfaces, the order flows, and then as we oversee the markets, both FINRA and the SEC can go in and examine against that."

Now, Gensler continued, "technology comes along — we move from telephones to … the internet and that creates new challenges." Then come text messages and other off-channel communications, Gensler said.

"It's just really important that firms … are capturing those communications related to their operations, the order flow, the customer messages and the like," he said. "People can use whatever chat rooms or communications channels they find appropriate, but they have to capture those communications just as you did in earlier technologies."