401(k) Specialist Issue 2 - 2020 - 29

401(k) REGULATIONS
simply believing this to be true.
Reg BI enhances a broker-dealer's standard
of conduct beyond the existing " reasonable
basis " suitability obligation by requiring a
broker-dealer to act in the best interest of
its retail customer at the time of making a
recommendation, and proscribes placing the
broker-dealer's financial interests ahead of that
of its customer.
Satisfying this enhanced obligation requires
the broker-dealer to address conflicts of interest
by establishing, maintaining, and enforcing
policies and procedures reasonably designed to
identify and fully and fairly disclose material
facts about conflicts of interest.
The SEC made clear the best interest
standard cannot be satisfied through disclosure
alone. Thus, when mere disclosure of conflicts
is insufficient, broker-dealers may need to
mitigate or eliminate the conflict of interest
altogether.
Industry self-regulator FINRA has made it
a priority this year to help its member firms
understand and comply with Reg BI with
resources like checklists, podcasts and a compliance
guide aimed specifically at smaller firms.
For its part, the SEC released guidance in the
form of answers to " frequently asked questions "
surrounding Reg BI.
Blaine Aiken, executive chairman at Fi360, a
Broadridge company, summarized it all pretty
well in a blog post earlier this year, saying, " Reg
BI is nearly upon us; a new version of a DOL
fiduciary rule is expected later this year; and
states are introducing their own fiduciary rules.
Change is the only regulatory certainty. "
The implementation of Reg BI represents
another giant step on the road to providing
clients with a better, more trusting experience
with their wealth advisors, Aiken continued.
" Those firms that deliver a seamless Reg BI
experience-and visibly put investor best
interests first-will advance competitively in
the eyes of their current clients and future
prospects. "
COULD LEGAL CHALLENGE STILL STOP REG BI?
T
he SEC says Reg BI will enhance the broker-dealer standard
of conduct beyond existing suitability obligations
and make it clear that a broker-dealer may not put its
financial interests ahead of the interests of a retail customer
when making recommendations.
But, while Reg BI's introduction of fiduciary-like obligations
for broker-dealers does narrow the gap between the baseline
standards for non-fiduciary and fiduciary advice, it still falls
short of a full fiduciary standard.
This, Reg BI critics contend, is illegal due to 2010's DoddFrank
Wall Street Reform Act, and because of this, lawsuits
to prevent its implementation have been filed and are about
the only thing that could prevent Reg BI from taking effect on
June 30.
Eight state attorneys general filed a lawsuit in the Southern
District of New York last September seeking to block implementation
of Reg BI, claiming it fails to meet basic investor
protections established within Dodd-Frank.
Also in September, Michael Kitces and his XY Planning Network
filed suit against the SEC over Reg BI's " double standard "
for financial planning advice. The suit claims the " the SEC has
exceeded its authority by impermissibly trying to re-write the
registration requirements to become an investment adviser, "
and that operating under a fiduciary standard of care is paramount.
Both
cases were consolidated because they address overlapping
issues.
Then in early January, former Democratic legislators Barney
Frank and Chris Dodd, the political duo behind Dodd-Frank,
added their names to an amicus brief filed in support of the
XY Planning Network lawsuit challenging Reg BI specifically
on the grounds that it failed to adhere to provisions of DoddFrank.
The
amicus brief claims the SEC needed to harmonize the
standard of care for broker-dealers and investment advisors
but did not, and the " Best Interest rule perpetuates the very
inconsistency in standards of care that Congress passed the
Dodd-Frank Act to fix. "
In short, it concludes, " the SEC's rule fails to harmonize the
standards for broker-dealers and investment advisers through
a fiduciary rule, and is therefore at odds with the text and
structure of [Dodd Frank] Section 913, as well as Congress'
plan in passing it. The rule cannot stand. "
The amicus brief, also signed by current high-profile members
of Congress Rep. Maxine Waters (D-CA) and Rep. Jerrold
Nadler (D-NY), urges the 2nd U.S. Circuit Court of Appeals to
take up the case.
In one of his popular Nerd's Eye View blog posts explaining
his lawsuit, Kitces says the issue is simply that Congress has
repeatedly prescribed that the delivery of financial advice
must be delivered under a fiduciary standard of care, either by
lifting the standards for brokers when providing such advice,
or by requiring such advice to be delivered as a registered
investment adviser in the first place.
" In other words, the point is not to challenge the broker-dealer
model, but simply to separate brokerage sales from
investment advice-as Congress mandated nearly 80 years
ago-and instead let financial advisors be (fiduciary) advisors,
and let brokers be brokers (who market and communicate
their services as such to the public), " Kitces wrote.
Legal experts have widely suggested the 2nd Circuit is unlikely
to halt Reg BI, and had not done so as of mid-March.
Legal observers have been mixed on their opinions, with
some saying the 2nd Circuit is unlikely to halt Reg BI while
others anticipate the rule will be vacated before June 30.
Alternatively, if faced with delayed implementation due to the
Appeals Court, the SEC could choose to modify Reg BI to put
it in compliance with Dodd-Frank.
- Brian Anderson
ISSUE 2 2020 | 401kSpecialist.com
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401(k) Specialist Issue 2 - 2020

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