Reg BI’s Unhappy Second Birthday

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The SEC’s Regulation Best Interest (Reg BI) turns two on June 30th. Reg BI was supposed to help investors better understand how advisors and brokers differ and have BDs meet a “best interest” standard based on fiduciary principles.

It turns out that Reg BI is doing the opposite.

Let’s start with a little background. The SEC fought hard for Reg BI, as explained in its April 18, 2018 proposal:

Investor confusion regarding the difference between broker-dealers and investment advisers …. (they) are subject to various different regulatory regimes … (and) many investors do not have a firm grasp on the important differences between BDs and IAs.

It was passed on June 5, 2019. Reg BI was championed by SEC Chairman Jay Clayton, who said it addressed “Investor confusion regarding the difference between broker-dealers and investment advisers…”

The 770-plus-page release explained what matters about BDs and IAs.The SEC wrote about brokers on page six:

As a general matter BDs and IAs have different types of relationships … different compensation models. … Broker-dealers typically provide transaction-specific recommendations (and) may include recommending transactions where the broker-dealer is recommending buying securities from or selling securities to retail customers on a retail basis or recommending proprietary products. …