Securities and Exchange Commission Chairman Jay Clayton said Monday the new broker investment advice standard is ensuring that financial professionals registered as investment advisers and brokers act in their clients best interests — no matter which hat they’re wearing.
Over the first few months that it’s been enforced, Clayton said dual registrants understand they must know their customers and follow policies and procedures that curb conflicts of interest whether they’re operating in advisory accounts and charging fees or brokerage accounts charging commissions.
“The dual-hatted investment professional — the investment adviser-broker dealer who’s now subject to [Reg BI] — is finding out that while the compensation models are different … the standard you owe your customer is very much the same,” Clayton said a the virtual Securities Industry and Financial Markets Association annual conference. “You’re seeing it in the disclosures.”
The SEC is continuing to regulate brokers and advisers differently following the advent of Reg BI. While the new rule applies to brokers, advisers still owe their clients a fiduciary duty under the Investment Advisers Act.
As he has indicated since Reg BI was proposed two years ago, Clayton said the SEC wants to maintain the brokerage and advisory models instead of subjecting all financial professionals to the adviser standard.
“I think it’s going pretty well,” Clayton said. “We now have a fair amount of harmonization across the customer experience whether you’re in a commission model or a fee-for-service model. We’re very happy that we preserved that customer choice. It enhances competition.”
Investor advocates, Democratic lawmakers and some state regulators criticize Reg BI as being too weak to protect investors from broker conflicts because it falls short of fiduciary duty.
Opponents hope a Democratic-majority SEC will scrap Reg BI or interpret it differently than the Republican-majority SEC under Clayton, if Democrats win the White House in the election. The five-member SEC has a majority that reflects the presidential administration.
Clayton said he’s “cautiously satisfied” with what he’s seen so far on compliance with Reg BI and a related disclosure document known as Form CRS. He reiterated the agency is seeing instances where financial firms are not making full disclosure of their or their investment professionals’ compliance violations.
“If you have a disciplinary history, the answer is ‘yes,’” on Form CRS, Clayton said.
The Reg BI regulatory package also included an updated SEC interpretation of the investment advisers’ standard. “I hope that the scope of the [adviser-client] relationship is better understood,” Clayton said.
He asserted the Reg BI disclosures, which cover compensation, services, standard of care and other factors for brokers, are more detailed than what is required of advisers.
“It’s a more prescriptive standard than the IA standard,” Clayton said.
SIFMA has been an avid proponent of Reg BI. “There’s a lot of teeth in the rule,” said SIFMA chief executive Kenneth Bentsen Jr., who interviewed Clayton at the SIFMA conference.
Reg BI critics counter that the brokerage industry backs Reg BI because it doesn’t force much of a change in their standard of conduct.
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