Compliance May 16, 2023

SEC Head Gensler Says Reg BI Not ‘Check the Box’ Exercise

The SEC chairman made remarks about Reg BI, Reg BE and about AI’s role in the markets at FINRA’s annual conference.

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Gary Gensler

The Regulation Best Interest rule overseeing how financial advisers make recommendations to clients cannot be treated as a “check the box” exercise, Securities and Exchange Commission Chairman Gary Gensler said at the Financial Industry Regulatory Authority’s annual conference on Tuesday. He discussed Reg BI and Reg BE, as well as artificial intelligence and what each means for advisers and broker/dealers.

Gensler took the chance to reiterate the SEC’s views on Reg BI to the audience of financial sector players just a little less than a month after the regulator put out renewed guidance on Reg BI that calls for advisers to gain a more detailed understanding of their clients and for ensuring a broad array of investment options.  On Tuesday, Gensler emphasized that advisers need to look at “more than suitability” and consider all costs and alternatives to be sure their advice is truly in their clients’ best interest, not merely an acceptable recommendation.

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The SEC head also made comments about the Regulation Best Execution rule, an SEC proposal made in December 2022 to establish a regulatory framework for the best execution of securities trading for brokers and dealers. FINRA President and CEO Robert Cook, asked Gensler why it was necessary for the SEC to propose a new Reg BE when FINRA, a non-profit overseen by the SEC, already has one.

Gensler responded by saying that Reg BE “is far too fundamental an area” for the SEC to not have it on its books. The SEC, as part of the “official sector,” should have its version of Reg BE and not “rely on a self-regulatory organization,” he said, adding that he was surprised the SEC did not already have such a regulation when he first joined the SEC.

During the conversation with Gensler, Cook recommended that listeners refer to SEC staff bulletins on Reg BI. These include one on conflicts, which highlights the need to mitigate conflicts and not just disclose them; and another on the Care Obligation, which urges advisers to consider the unique needs of each client and carefully consider alternatives.

At the Washington, D.C.-based gathering, Gensler also weighed in on the potential use of artificial intelligence in financial advising and how such development would be regulated. The SEC head said that predictive AI can help optimize a client’s best interest and can bring greater access to advice and offerings, but that implementation will depend on how the AI is programmed and trained. There are many factors that go into optimal investment advice, and if an AI platform is made to help a brokerage or adviser, then that can introduce new conflicts of interest, Gensler said.

There are currently no proposals to regulate AI, though the chairman did discuss the perils and potentials of AI at a hearing hosted by the House Committee on Financial Services in April, saying that the key regulatory interest in AI is from the perspective of a fiduciary—making sure the technology advances a client’s best interest.

Lastly, Gensler discussed the four market structure proposals that the SEC has brought forward during his tenure, which cover a broad range of issues in the equity markets and include Reg BE. Gensler referred to the proposals as an “important set of initiatives.” He said that the previous update of equity markets was in 2005, and economic and technological changes justify the proposals made in December 2022.

Compliance May 16, 2023

ASA: DOL Drops Appeal to 401(k) Rollover Advice Ruling

According to the trade association, the regulator will not appeal a ruling that keeps 401(k) rollover advice outside of fiduciary investment guidance.

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The Department of Labor has withdrawn its appeal of a February federal district court ruling that ensured 401(k) rollover recommendations would not be seen as fiduciary investment advice, according to the American Securities Association.

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The ASA announced on Monday that the DOL has voluntarily dropped the appeal of a case the Washington, D.C.-based trade association of regional financial services firms brought against the regulator. The ASA sued the DOL in early 2022, challenging guidance under the Administrative Procedure Act that said an adviser’s initial retirement plan rollover recommendation would qualify as investment advice and be subject to fiduciary obligations under the Employee Retirement Income Security Act.

“We are pleased the DOL dropped its appeal of the district court’s decision to strike down [the DOL’s] attempt to change existing rules about retirement advice without a formal rulemaking,” Chris Iacovella, president and CEO of the American Securities Association, said in a statement.

In February, Judge Virginia M. Hernandez Covington, of the U.S. District Court for the Middle District of Florida’s Tampa Division, ruled against the DOL’s Employee Benefits Security Administration in American Securities Association v. United States Department of Labor, et al. Covington ruled that EBSA’s guidance on rollovers was “arbitrary and capricious” in the agency’s interpretation of the five-part test used for determining when recommendations count as investment advice.

The DOL issued an appeal notice in April, according to court filings, but did not lay out arguments. There is no additional posting on the court docket for the case as of Tuesday, and the DOL did not immediately respond to a request for confirmation.

The DOL and EBSA are continuing to review the definition of a fiduciary and are working on new guidance that will “more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries,” according to the DOL’s regulatory agenda.

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