SEC building From an industryperspective, perhaps no stakeholder holds more sway over the SEC'sactions on Reg BI than the Securities Industry and FinancialMarkets Association. (Photo: Diego M. Radzinschi/ALM)

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More than half of all U.S. adults own an individual stock, areinvested in a stock market fund, an IRA, or participate in anemployer-sponsored 401(k), according to themost recent accounting from Gallup.

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By that measure, the investing public is the largest stakeholderimpacted by the Securities and Exchange Commission's proposed rules for enhancing investorprotections and raising the standard of care required of broker-dealers andregistered advisors that serve the retail investment market.

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Related: Preamble to SEC best interest proposal may openback door for class actions

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But from an industry perspective, perhaps no stakeholder holdsmore sway than the Securities Industry and Financial MarketsAssociation.

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Retail investors have nearly 4,000 wire houses and independentbroker-dealers from which to choose. SIFMA's members represent 75percent of the broker-dealer sector by revenue, according to thenon-profit advocacy group's website.

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Along with the U.S. Chamber of Commerce and other financial andinsurance services trade organizations, SIFMA was a part of thelawsuit that ultimately swayed the U.S. Court of Appeals for theFifth Circuit to vacate the Labor Department's fiduciary rule.

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The organization's posture towards the SEC's proposed RegulationBest Interest, which attempts to place a standard of care onbroker-dealer recommendations that exceeds FINRA's existingsuitability standard, is considerably moresupportive than it was to Labor's fiduciary rule.

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“SIFMA has long supported the creation of a heightened bestinterest standard for broker-dealers across all accounts thatbuilds upon the existing, robust, broker-dealer regulatory regime.We commend the SEC for proposing a new best interest standard thatwould protect retail investors while preserving retail investorchoice,” said SIFMA President and CEO Kenneth E. Bentsen, Jr. in astatement.

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Bentsen and SIFMA are calling on the SEC to “swiftly proceed tofinal rulemaking”–but not without considerable revisions andclarifications to the agency's proposals.

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“Certain key changes must be made to the proposals to make themworkable for the industry and to avoid unintended consequences,such as decreased choice for retail investors and a shift away fromthe brokerage model,” SIFMA's comment letter says.

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SIFMA is recommending a 24-month implementation period onceproposals are finalized.

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Here is a look at 10 of the changes and clarifications SIFMAwants to see to SEC's Reg BI, according to its exhaustive 51-pagecomment letter. The list is by no means comprehensive.

1. No need to define “best interest”

Reg BI requires brokers to make recommendations in the bestinterest of investors. Consumer advocates and others havecriticized the proposal for not defining best interest. SIFMA isnot asking the SEC to define the term, because the proposal laysout obligations required to meet a best interest standard throughnew disclosure, care, and conflict of interest obligations.

2. Further clarity needed on Care Obligation

By SIFMA and others' read, brokers would not have to recommendthe cheapest investments to satisfy the care obligation.

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But determining how brokers weigh the cost of an investment whenmeeting the care obligation is “difficult,” says SIFMA.

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The organization wants the SEC to provide examples of whenrecommending the cheapest investment would not satisfy Reg BI.

3. Limiting recommendations to proprietary products

SIFMA reads the SEC's proposal as allowing recommendations froma limited list of a firm's proprietary funds and other productcategories so long as that conflict is disclosed to clients. SIFMAis asking the SEC to confirm the accuracy of its reading.

4. Best interest or absolute best investment?

The best interest standard in proposed Reg BI requires brokersto put the interests of their customers before the financial orother interests of brokers or their firms.

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But best interest does not mean the “absolute best” investmentrecommendation, according to SIFMA's read of the proposal.

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“The term 'best interest' acknowledges that a broker-dealer willnot look at every single possible security, but rather look at theappropriate securities offered on its platform, when making arecommendation,” writes SIFMA.

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“Because what is in the customer's best interest inherentlyinvolves a level of subjectivity, it is not something that shouldbe assessed with perfect hindsight,” the letter says. SIFMA isasking for validation of its interpretation.

5. Mitigation vs. elimination

Reg BI calls on conflicts of interest to be mitigated when theycannot be eliminated. In the preamble to the proposal, the SEChighlights certain compensation incentives that ought to beconsidered for elimination.

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“The Reg BI Proposing Release contains strong criticism ofcertain types of financial incentives, and it is not clear howrelated conflicts may be mitigated without eliminating themaltogether,” writes SIFMA.

6. Revenue sharing from recommended funds?

Mutual funds carry differential revenue sharing payments tobrokers. SIFMA wants clarification that 12b-1 and other revenuesharing arrangements are not prohibited by Reg BI, so long asmaterial conflicts of interest borne by the payments are disclosedand mitigated.

7. Yea or nay on sales contests

Sales contests that incentivize brokers have come under widecriticism from politicians, consumer advocates, stateregulators—and yes, the SEC. According to the criticisms, salescontests incentivize brokers to hit production marks irrespectiveof investor interests.

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The preamble to Reg BI offers a not-so-subtle rebuke of thepractice. But SIFMA takes issue that all incentive programs areinherently conflicted.

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“We believe such concerns around incentives do not exist withrespect to programs that reward asset growth (including non-productspecific sales contests) or asset flows, or recruitment bonusestied to assets under management, total production, or revenuegrowth because these programs do not give associated persons anincentive to recommend specific securities that may not beconsistent with a customer's best interest,” writes SIFMA.

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SIFMA does agree that some product-specific sales contestsshould be eliminated when firms cannot adequately mitigateincentives that are “misaligned with the customer's bestinterest.”

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But even conflicts with product-centric contests can bemitigated with proper oversight, says SIFMA. Under onehypothetical, a firm could incentivize brokers to satisfycustomers' best interests through sales contests. Should thatoption be eliminated?

8. Do unsolicited transactions trigger a breach?

Retail investors may not always listen to brokers. Would atransaction executed by a broker at a customer's demand—even if thebrokers suggested against it–trigger a breach of the best intereststandard? SIFMA is asking for clarity on transactions marked asunsolicited.

9. When propriety investments cost the same to investors butmake more for brokers

A broker recommends a propriety fund that has a similarperformance track record and commissions to non-proprietaryoptions, but will also generate more income for the broker and herfirm.

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Reg BI does not require the lowest cost investment to berecommended. If the proprietary investment recommendation is madein the client's best interest, does is satisfy Reg BI?

10. No restriction on advisor/adviser title needed

Outside of Reg BI, the SEC is proposing to restrictbroker-dealers from holding themselves out as “advisors” or “advisers” in their titles in aneffort to reduce investor confusion over the level of fiduciaryservices they are receiving.

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SIFMA doesn't see the restriction as necessary. “We believe thatProposed Reg BI solves that confusion as well. Although theproposed best interest standard for broker-dealers is not labeledas a fiduciary one, it clearly has the hallmarks of a fiduciarystandard, including a duty of care and a duty of loyalty.”

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.