Will SEC’s Broker Conduct Rule Work? BDs, Attorneys Weigh In
May 23, 2018 by Melanie Waddell
Brett Redfearn, director of the Securities and Exchange Commission’s Division of Trading and Markets, urged broker-dealers Tuesday to comment on the agency’s standard of conduct proposals, saying the three-pronged package is “an important step, but it’s only a step.”
Broker-dealer execs were quick to weigh in with their comments at a Financial Industry Regulatory Authority event about the proposed Regulation Best Interest, with one voicing his concern that it will be a compliance nightmare for small broker-dealers.
The agency, Redfearn said during remarks at FINRA’s annual conference in Washington, is “asking for your input on a long list of questions,” requesting that broker-dealers provide the agency with data on their current business practices “related to advice and how they would change in response to the proposal.”
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He encouraged individual firms to consider providing “descriptions of their current business practices and compliance systems.”
The comment period expires on Aug. 7.
Redfearn noted that, along with garnering feedback via town halls, the agency’s Office of the Investor Advocate is “performing investor testing,” which he said the agency anticipates making the results available in the public comment file.
The agency will also pursue “regulatory harmonization” as it collaborates with the Department of Labor, state securities regulators, state insurance regulators as well as FINRA, Redfearn said.
Reg BI’s ‘Intended Purpose’
Since the agency approved the standard of conduct package on April 18, Redfearn said he’s “seen and heard a lot of commentary about what Regulation Best Interest is supposed to accomplish and the many ways in which it does too much or too little,” with folks seeing “something different in it. And, each tends to be predisposed to see what they want to see at this stage of the game.”
What does he see? “A significant change from the status quo for broker-dealers that provide advice. But [Reg BI] is a change that builds upon how brokerage advice has been regulated for decades.”
In undertaking the rulemaking, he continued, “the Commission recognized the importance of the transactional or ‘pay-as-you go’ brokerage model as a potentially cost effective, and sometimes less costly option for investors to pay for investment advice.”
Reg BI, he said, “tackles a fundamental question of vital importance to investors. And that is, ‘how should a financial professional provide advice in the face of conflicts?’”
The proposal also sets out for broker-dealers “a disclosure obligation to address some of the widely documented investor confusion,” Redfearn said.
BDs, Attorneys Weigh In
Robert Colby, FINRA’s chief legal officer, received mixed reviews when he asked a panel of broker-dealer officials after Redfearn’s remarks if the SEC’s Regulation Best Interest “will work.”
“I’m optimistic this will work quite well,” said Daniel Kosowsky, a managing director at Morgan Stanley, noting, however, that he sees challenges “on the operational” side in determining “timely disclosures” and how they “should be disclosed.”
Robert Muh, CEO of Sutter Securities Inc., stated that he has “some real concerns and problems with the [Reg BI] rule as it’s currently written. The problem is, it’s one size fits all.”
Of the roughly 3,700 FINRA members, “over 1,000 of the member firms have five or fewer registered people,” Muh said.
The larger firms, Muh continued, “can handle this [proposed rule] relatively easily. The burden is going to be on the small firms.”
Hillary Sale, Walter D. Coles professor of law and professor of management at Washington University in St. Louis, said that while “disclosure is a perfectly good thing … what we know from the research is that when you disclose conflicts, the clients trust you more, which means you’re better able to dupe them once you tell them that they should trust you because you disclosed your conflict.”
Therefore, disclosure, she continued, “is actually a two-edged sword.”
Stephen Cutler, a partner at Thatcher and Bartlett and former vice chairman and general counsel for JPMorgan Chase, opined that the challenge of Reg BI is “the nondisclosure parts” of the proposal. “I think it’s easy to get disclosure right here,” but problems arise “when we start to talk about eliminating conflicts or mitigating conflicts,” particularly around proprietary products.
“We don’t know at this point what is enough of a mitigant,” Cutler said. “When do you have to eliminate a conflict or mitigate it? How much mitigation is enough?”
