The Securities and Exchanges Commission has made its standards-of-conduct package proposal a top priority, with a final rule expected in the coming months.
Depending how things shake out, there could be residual implications for a number of industry stakeholders, including fellow regulators and state officials.
Late last month, Robert Colby, chief legal officer at the Financial Industry Regulatory Authority, said the organization will re-examine its suitability rule for broker-dealers, once the SEC issues its package, which has become commonly known as Reg BI. The suitability rule has similar goals and requires, in part, that a broker-dealer or associated person has "a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer."
Reg BI, in part, aims to require broker-dealers to put clients' financial interests ahead of their own and mitigate financial conflicts.
"There's a lot of overlap between the existing suitability rule and the direction that Reg BI's going in order to mitigate conflicts," Mr. Colby said during a panel discussion at the Securities Industry and Financial Markets Association's annual compliance seminar in Phoenix, adding that FINRA could tweak its rule, if necessary. "If we do keep it, we want to make sure that they're completely aligned," he said.
Phyllis Borzi, who served as assistant secretary of labor for the Employee Benefits Security Administration from July 2009 to January 2017, said it would be a bad idea for FINRA to scrap its suitability rule because Reg BI doesn't go as far.
When examining both rules, David G. Tittsworth, a lawyer at Ropes & Gray LLP in Washington, said Reg BI establishes higher standards for broker-dealers because it requires them to disclose and in some cases mitigate conflicts of interest. Critics say Reg BI's current disclosure requirements are insufficient because broker-dealers would be able to disclose potential conflicts and go about giving advice all the same.
At the Department of Labor, the 5th U.S. Circuit Court of Appeals vacated its fiduciary rule in March 2018, saying it represented regula- tory overreach. But in its fall regulatory agenda, the DOL said it is "considering regulatory options in light of the (5th) circuit opinion," with a final rule expected by September.
Michael P. Kreps, Washington-based principal at Groom Law Group, said it's likely staffers at the DOL and SEC have communicated during this rule-making process, and in a 2017 Wall Street Journal op-ed, Labor Secretary Alexander Acosta wrote about the importance of working with the SEC on this issue.
"I don't anticipate the Department of Labor moving in the short term to do much, although they may, but you'd expect longer term that they would at the very least begin to harmonize with the SEC and make sure that anything the SEC does is workable from an ERISA perspective," Mr. Kreps said.
If Reg BI were to make certain financial professionals operate as fiduciaries, they could be subject to the DOL's prohibited transaction rules, which generally means those professionals can't give advice that results in them receiving additional compensation without an exemption, Mr. Kreps noted. The DOL may then issue a rule of its own or make certain clarifications in response, he added.