Gensler: SEC working on bulletins to illuminate aspects of Reg BI

The Securities and Exchange Commission is drafting more guidance to help financial advisers better understand Regulation Best Interest and to ensure it delivers on its investor protection promises, Chairman Gary Gensler said this week as the measure enters its third year of being in force.

The Reg BI rulemaking package, which included the broker-dealer standard of conduct as well the SECs interpretation of the separate fiduciary standard that governs investment advisers, was implemented on June 30, 2020. It was promulgated by the SEC under Gensler’s predecessor, former Chairman Jay Clayton.

Since then the SEC and the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, have been conducting examinations to monitor compliance with Reg BI, which prohibits brokers from putting their interests ahead of their customers’ interests.

Earlier this year, the SEC released a bulletin outlining how brokers and advisers can adhere to their respective standards when opening accounts and rolling over retirement assets for clients. More bulletins covering other aspects of Reg BI, such as conflicts of interest, are on their way.

“Staff is also going to take up, I’d anticipate, three other areas that are at the core of the regulations,” Gensler said in an interview Wednesday with InvestmentNews. “It’s around conflicts, around consideration of reasonably available alternatives and around costs. Staff is working on it.”

Over the first 15 months of his tenure, Gensler has pursued a broad and aggressive agenda. But a Reg BI do-over is not on it. Even though investor advocates criticized Reg BI as being too weak to curb brokers’ conflicts of interest — and its obligations are far less sweeping than an investment-advice standard recommended for the state of Maryland by a commission Gensler headed in 2018 — Gensler has left the measure intact.

“This would not have been the rule that I would have put in place or supported if I was on the [SEC] at the time,” Gensler said. “It’s something I inherited.”

ENSURING REG BI DELIVERS

In order to get the most out of the rule, he is emphasizing guidance and enforcement.

“What’s at the core is that investors’ interests come first and that we have something rigorous to protect investors,” Gensler said. “We as an agency are trying to ensure on behalf of the investing public that best interest means best interest and fiduciary standard means really fiduciary standard.”

The SEC is expending a lot of resources to do so.

“The examination team and the enforcement team, which I would note is half of our agency in head count, are going to be examining for and, from time to time if appropriate, if the facts and the law bear out, follow it to enforcement using the guidance through these bulletins as well," he said. "Then [we’ll] see where we are.”

Financial firms and advisers have a role in making Reg BI work, Gensler said.

“It’s also up to the industry,” he said. “Are they putting their clients’ interests first? That’s the spirit of it and the letter of it.”

Reg BI is a principles-based rule, which means it doesn’t spell out explicitly what best interest means, what conflicts need to be mitigated or how to mitigate them — a situation that has frustrated advisers, advocates and firms.

Gensler, who has stressed lowering the cost of financial intermediaries, offered a framework.

“In putting your clients’ best interest first, you want to get the best returns for them,” he said. “You don’t want to steer them into a higher-cost, higher-load product.”

FIRST ENFORCEMENT CASE

The first SEC enforcement case citing Reg BI focused on costly, complicated products. The agency alleged brokers at Western International Securities Inc. sold illiquid, high-risk bonds to many customers without determining whether the recommendations were in their best interests.

Critics asserted the action was not uniquely one that could have been brought under Reg BI. Knut Rostad, president of the Institute for the Fiduciary Standard, said it was a suitability case, referring to the broker standard of conduct prior to Reg BI.

But Gensler said the case involved affirmative Reg BI obligations, such as those relating to conflicts of interest, reasonable alternatives and costs. “It does go beyond that which was in place under the earlier rule,” he said.

ONLINE ADVICE CONFLICTS

Gensler hinted that Reg BI might address conflicts of interest that arise in online investing. He's concerned about algorithms that encourage investors to buy certain products. Are the online platforms optimizing for an investor’s age, net worth and risk tolerance? Or are they optimizing for the revenue of the financial firm that runs them?

“Therein lies a conflict right at the core and the heart of the question of are you putting your clients’ interests ahead of your own,” Gensler said.

On its latest rulemaking agenda, the agency says it will propose a regulation later this year related to the digital engagement practices of investment advisers, such the use of predictive data analytics, differential marketing and behavioral prompts.

“It’s a truly transformational time,” Gensler said. “We have a role to play to really consider the conflicts when the data analytics are steering somebody in part for the revenues of the adviser or the revenues of the broker-dealer.”

In the meantime, the agency is concentrating on getting the best out of Reg BI through guidance and enforcement on behalf of investors who may be working with financial advisers who are putting themselves first.

“There’s inherent conflicts in the world of money and finance,” Gensler said. “That’s been true since antiquity.”