This article originally appeared on InvestmentNews by Mark Schoeff, Jr.
If you’re into sustainable investing, you must be thrilled with the Securities and Exchange Commission.
In his first three months in office, SEC Chairman Gary Gensler has given numerous speeches about the importance of environmental, social and governance factors in the investment climate. He has put on the SEC’s agenda rule proposals on climate risk and human capital reporting.
But if you’re into investment advice reform, you may be feeling a bit neglected by the SEC.
Regulation Best Interest, the broker advice standard, went into force last June. After more than a year of operating under Reg BI, we don’t know to what extent brokerages have changed their advice practices to ensure that their registered representatives are not placing their own revenue desires ahead of their customers’ interest in investment returns.
The brokerage industry maintains Reg BI is much stronger than the previous suitability standard. Investor advocates asserted that Reg BI was too weak to curb brokers’ conflicts of interest.
It likely will take a good while longer to know who is right.
The measure was the centerpiece of former SEC Chair Jay Clayton’s agenda. Gensler will not rip it up and start over. Rather, he told lawmakers when asked at an online congressional hearing, the agency will use guidance, examinations and enforcement to ensure the rule actually protects investors.
But much remains unanswered about Reg BI. For instance, “best interest” is an amorphous term, and what qualifies as “mitigation” of conflicts remains in the eye of the beholder.
“Reg BI urgently needs to offer real guidance to address material issues which remain unclear or undefined,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “Start with ‘best interest’ or ‘mitigation.’ If Reg BI is to be credible, this should not be a several-year process.”
The SEC could take a page out of its ESG playbook to shape Reg BI, Rostad said. For instance, among the agency’s priorities are defining what ESG means and developing metrics for measuring ESG factors.
“Chairman Gensler and [Republican] Commissioner [Hester] Peirce agree on the need for specificity,” Rostad said. “This is important. Apply the same principle to Reg BI, and we are halfway there.”
PUTTING TEETH IN REG BI?
Gensler already has made a major decision that likely will affect how Reg BI evolves. In late June, he appointed New Jersey Attorney General Gurbir S. Grewal to head the agency’s Division of Enforcement.
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