Reg BI: Raising the Bar on Investor Protection While Preserving Choice

Ensuring investors are protected in their dealings with financial professionals is a universal goal. The financial services industry, consumer advocates, legislators, and regulators at a variety of agencies and levels have long been examining the issue and debating the best approach. For more than ten years, SIFMA has supported the creation of a heightened best interest standard for broker-dealers that builds upon the existing regime. The discussion has never been about whether to raise investor protection, rather, how to do so in a manner that is truly in the everyday investors’ best interest and does not limit access to advice or choice of investment products.

Regulation Best Interest, the Securities and Exchange Commission’s (SEC) proposed best-interest standard and the subject of a House Financial Services Subcommittee hearing today, goes a long way to accomplishing that goal by clearly raising the bar on investor protection, while preserving choice.

By any measure, the SEC’s proposed standard materially exceeds the existing FINRA suitability standard to the benefit and for the protection of retail customers. Specifically, it enhances broker-dealer conduct standards by adding new and heightened care, disclosure, and conflicts-of-interest obligations.

For example, under Reg BI, recommendations must not only be suitable but in the retail customer’s “best interest.” This means broker-dealers cannot put their interests ahead of the interests of the retail customer. In addition, broker-dealers must more heavily weigh the cost of a security or strategy in determining whether to recommend the security or strategy.

Under Reg BI, broker-dealers must mitigate financial conflicts of interest. Disclosure of a financial conflict alone also is not considered adequate under the proposed rule, effectively holding broker-dealers to a higher standard than the one applicable to investment advisers today.

Coupled with the far more frequent regulatory exam rate for broker-dealers, SEC and FINRA enforcement and oversight, and the private right of action afforded to retail customers through FINRA arbitration, the new SEC proposal represents a true best-interest standard with real teeth.

In many ways Reg BI would provide greater protection for retail customers than the current regulatory regime for investment advisers. Crucially important for investors is that Reg BI specifically seeks to preserve access and choice while providing protections in the areas the Department of Labor’s (DOL) “conflict of interest” rule sought to address.

The proposed new standards — together with existing standards — address the intended principles, goals, elements and protections of the former DOL fiduciary rule. At the same time, it avoids the many shortcomings that were embedded in the DOL rule, such as those that threatened to lead to greater cost, less choice, and fewer professional services and options for retirement savers.

Further, the SEC’s proposed Reg BI applies more broadly than the DOL fiduciary rule because it applies to all retail customer accounts, not just retirement accounts, and will allow the SEC to enforce a common standard across the industry.

Several states are currently at various stages of proposing fiduciary standards to apply at the state-level. While well-intentioned, these proposals are off-base for several reasons, including significant federal pre-emption issues. But the most significant concern is that state-level rules will result in a patchwork of conflicting standards, increasing investor confusion and ultimately limiting choice and access to investment products and advice.

The best way to protect investors and avoid investor confusion is to allow the SEC – the primary federal regulatory agency – to finalize the new nationwide standard. In its final form, state regulators may find the rule satisfies most, if not all, investor protection concerns.

On balance, the SEC proposal puts regulators, industry and, most importantly, investors, in a much stronger position on investor protection. It represents a clear path forward that is both workable for the industry and preserves investor choice. The time to move to finalize the rule is now.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also chairman of the Global Financial Markets Association (GFMA), of which SIFMA is the U.S. regional member. 

Earlier today, SIFMA submitted a statement to the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets in conjunction with a hearing entitled, “Putting Investors First? Examining the SEC’s Best Interest Rule.” To read the statement and more on investor protection, visit