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FSI predicts SEC will issue best interest rule next year

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SALT LAKE CITY — FSI predicts the SEC will issue its proposed Regulation Best Interest rule next year and implement it in 2020. But certain aspects of the rule remain open questions.

The independent broker-dealer advocacy group’s general counsel, David Bellaire, and other experts made the forecast on a panel at the FSI Forum on Sept. 25. Fiduciary advocates foresee a similar timeline, now that the SEC has its full stable of five commissioners.

Critics like Sen. Elizabeth Warren have panned the SEC proposal for lacking the client protections of the now-vacated fiduciary rule. In a move last month displaying the changed landscape, Merrill Lynch lifted the ban on commissions in retirement accounts it imposed to comply with the rule.

IBDs and other brokerages have praised the SEC proposal’s approach even as they offered ideas for simplifying the potential guidelines. FSI, for example, called for a one-page, hyperlinked disclosure document for clients and for restricting use of the term “advisor” to dually-registered advisors and RIAs.

The key sticking points with the SEC proposal include its lack of a precise definition for clients’ best interest and the disclosure document, known as the “customer relationship summary” or Form CRS. Chairman Jay Clayton’s team could break up its proposal to move Reg BI forward, Bellaire says.

“I would guess that next year we’re going to see a final rule, at least dealing with the component of the overall package that was offered that focuses on the standard of care,” he told FSI members at the forum.

“The Form CRS and some of the other aspects of the overall package, I think, may be left for another day,” he continued, “because there has been an awful lot of input on Form CRS, some contradictory, some very persuasive, and there’s probably more work to be done there.”

Clashes over the Labor Department's fiduciary rule have carried over into the debate on the SEC's proposed regulation.
August 14

The timing of the rule and other issues make for an “unfortunate” but “unavoidable” wait-and-see dynamic, according to Derek Anderson, a Winget, Spadafora & Schwartzberg partner who represents firms and advisors in securities litigation. A final rule could be only six months away, though, he says.

Anderson, who outlined the Reg BI proposal in another session at the event, notes significant questions surrounding Form CRS and the extent to which the rule will equate “best interest” with fiduciary obligations. The fact that the SEC hasn’t yet defined “best interest” also stands out, he said.

“I think firms view that, for the most part, as a good thing,” Anderson said. “The downside to not having a definition, unfortunately, is that there’s this ambiguity that you all will have to deal with on an ongoing basis.”

FSI culls members from 160,000 independent contractors making up a little over half of all producing registered representatives, according to the organization. FSI members pay almost $6.8 billion in taxes each year to all levels of government while sustaining some 482,000 direct and supporting jobs.

The organization joined a lawsuit filed by trade and business organizations against the Labor Department which eventually resulted in the demise of the rule last March in a federal appeals court decision.

FSI’s role in the fight displayed its educational efforts about the IBD space, according to Bellaire and Katanya Moore, the organization’s associate general counsel.

Advisors and firms should not assume that “when you are talking to regulators that they know your business and they know the topic,” Moore said.

“No one knows it better than you do, so I think education is really important,” she said. “I think that was a situation where FSI correctly had to push. But I do think that, more times than not, we are often collaborating with regulators to get the right result.”

In his own remarks before FSI members, CEO Dale Brown praised the “courageous leadership” of the organization’s board for joining the lawsuit, and he called the court’s decision “an important victory for Main Street investors.”

The organization is also “providing meaningful input for improving” the SEC proposal, Brown added, referring to Reg BI as “a long overdue effort to modernize and harmonize the rules.”

The effort definitely carries time urgency, according to FSI board member and Securities America advisor Kim Kropp, who notes the midterm elections and the next presidential election could shift the balance of power at the federal level.

FSI and its allies “have our chance to get something put in place,” Kropp says. “The Department of Labor [rule] could be back, so let’s get this done, get this nailed down.”

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