The SEC shows every sign of moving ahead with its proposal for new rules governing brokers and advisors, but Regulation Best Interest will need substantial revisions before it wins the support of the one Democrat currently on the commission.
Commissioner Robert Jackson appealed for significant reforms to Reg BI at the annual SEC Speaks conference earlier this month, saying he is "very hopeful" that the commission can finalize the rule on a unanimous, bipartisan basis.
"I voted for the proposal because I thought it was the right step forward for the agency to take," Jackson says. "I said then and I believe today that there are significant changes we should make to the proposal before it goes final."
In separate remarks at the conference, held in Washington, Chairman Jay Clayton says that finalizing the rule is a "top priority" for him. Clayton previously indicated that he would like to put the measure to a vote later this year.
"My view is these standards should reflect what retail investors would reasonably expect of these financial professionals," he says.
But Clayton also stressed the importance of preserving investor access to a variety of business models and fee types. Many in the brokerage sector have cautioned that a strict, advisor-like fiduciary rule for brokers would effectively regulate the commission model out of business, cutting off access to basic financial advice for lower- and middle-income investors.
For Jackson, however, the proposed rules come up short because the term "best interest," the cornerstone upon which they are built, is left undefined.
"This is a unique moment in which we can and should speak with one voice," says SEC Commissioner Robert Jackson.
"What I've advocated for is that we clarify the standard with respect to what exactly are the obligations a broker owes to their customer," Jackson says. "To the degree that we call it 'Regulation Best Interest,' the standard doesn't need to be especially ‘lawyered’ or especially long. We can and should just say in my view that the obligation of the broker is to put the client's interest first."
Jackson also takes issue with the absence of specific provisions to bar some of the most egregious advisor conduct — conduct that leads to hopelessly conflicted or self-serving advice. The rule would be much improved with the addition of provisions that "limit or ban compensation practices that lead brokers to engage in conflicted activities," he says.
"[Y]ou can expect people in the marketplace to do that which they're paid to do," he says. "If you pay them extra to put people in in-house products that are bad for the people, you can expect that there will be conflicts that will be difficult to mitigate, so I've urged for changes there as well."
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Investor advocates blast the SEC's proposal, telling lawmakers it would do more harm than good.
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State regulators and state legislature are stepping in to propose initiatives to protect consumers against salespeople wrapped in fiduciary clothing.
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Whatever form the final rule takes, it will inevitably have its critics. Jackson is looking ahead not only to a potential legal challenge, but to how the marketplace will digest the rules, which could dramatically reshape compliance and enforcement in the brokerage sector.
Still, he sees the proposal as a potentially historic step forward given the longstanding debate and general inaction on new rules for broker conduct. In advancing such a consequential regulation, he argues, the commission should make every effort to craft a set of rules that can pass with a unanimous vote.
"The reason I think that's so important is that a rule like this is going to be long litigated — not just in the D.C. Circuit, but in the marketplace for years," Jackson says. "I think this is a unique moment in which we can and should speak with one voice, and I certainly hope we do.
