Fiduciary Rules - Where Are We Now?

Over the last few years we have traced the evolution of regulatory fiduciary rulemaking in our newsletters. We have followed the movement from virtually no definition of a fiduciary rule to a tight definition in the previously proposed Fiduciary Rule, and then on to where we are now. And just where is that today?

President Biden’s administration has just let the Trump-era version of a fiduciary rule, known as Reg BI, go into effect. Many in the wealth management industry thought the Biden Administration would use its powers to stop the rule’s enactment but instead elected to let it go into effect as of last Tuesday. The announcement was also made with positive and supportive language. The industry’s reaction was positive, but consumer advocates were disappointed as they were hoping for a more stringent rule from the Democratic administration more like that which was previously proposed under the Obama administration.

So what Is Regulation Best Interest (BI)?

It is a 2019 Securities and Exchange Commission (SEC) rule that requires broker-dealers to only recommend financial products to their customers that are in their customers' best interests and to clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have for the sale of those products. The Regulation BI rule falls under the Securities and Exchange Act of 1934 and establishes a standard of conduct for broker-dealers when recommending any securities transaction or investment strategy.

Previously, brokers were only held to the “suitability standard.” This meant that when brokers advised their clients, they only had to recommend investments that were suitable, but not necessarily in their clients' best interest. However, in the meantime, the 2017 Department of Labor Fiduciary Rule would have prevented professionals giving retirement advice from concealing any potential conflicts of interest and would have required them to disclose all fees and commissions in simple dollar terms to their clients to ensure full transparency.

Regulation FD, as it became known, was originally scheduled to be phased in from April 10, 2017, to January 1, 2018, but it was opposed by the Trump Administration and Jay Clayton, chair of the SEC. On June 21, 2018, the U.S. Fifth Circuit Court of Appeals officially vacated the rule, effectively killing it.

Reg BI and its related measures, like a required disclosure document, Form CRS, were the rulemaking of now-former SEC Chairman Jay Clayton’s term. He claimed that Reg BI is significantly stronger than the previous broker suitability standard. However, investment advocates contend Reg BI is too weak to curb broker conflicts of interest. They hope a Democratic-majority SEC under the Biden administration’s nominee for chairman, Gary Gensler, will define “best interest,” detail conflict mitigation, and pursue tough enforcement.

In the meantime, the meme stock frenzy is one of the best things that could have happened to Reg BI proponents because it could distract the new leadership of the SEC for about a year. Since it has dominated headlines, this means newly nominated SEC chief Gensler will likely be focusing on that immediately upon taking over. Bitcoin is another emerging issue given the huge run-up in prices and public focus. Reg BI is obviously very important, but may become second fiddle because of the other, more newsworthy issues.

So, Reg BI is in place for now but the evolution will likely continue. Brokers are now bound to place their clients’ interests above their own unless they can document why when they have not. And of course, Registered Investment Advisers have always had to put clients’ first, regardless of any new regulations. Stay tuned.