Government Shutdown Could Delay REG BI Rollout

Add another possible casualty to the government shutdown – the timetable of the Security and Exchange Commission’s Regulation Best Interest standard.

The wrinkle is one of the twists in the proposal’s journey to a standard. Among the revelations of the past few months:

• A New Commissioner - Commissioner Elad Roisman joined the SEC in September, replacing Former-Commissioner Michael Piwowar.
• A New Congress - the Democrats now control the House of Representatives.
• FINRA's Suitability Standard - In October, FINRA announced it would consider eliminating or revising its suitability standard to match REG BI.

While the SEC operates with limited personnel during the shutdown,  its proposed Regulation Best Interest rule, which was, in all likelihood, set to debut sometime in 2019, could remain shelved.

First-Quarter Hopes?

Despite much speculation from various industry sources saying that we could have a final Regulation Best Interest rule as early as the first quarter, no one knows when in 2019 to expect the final ruling, said Jim Lundy, partner at the Philadelphia law firm, Drinker Biddle & Reath, and SEC expert

The Commission has REG BI scheduled for the final ruling stage in September of 2019, but Chairman Jay Clayton has said publicly that if everything continued accordingly, it would be released sooner than September.

Using the information he has now, Lundy said, “I do think that it will occur before the end of this fiscal year.”

For the federal government, the fiscal year runs from October to September.

Summer seems like the most logical time to expect Regulation Best Interest, Lundy said, but the continuing government shutdown could push that date well into the third quarter.

“All of the staff, across all of the divisions have essentially been furloughed. So, no work at the staff level is being done in all likelihood, so that has cost them,” Lundy said.

New Commissioners

Another potential factor that could influence when a final REG BI rule is released is the addition of Commissioner Roisman. Roisman filled the seat left by Commissioner Michael Piwowar, who announced his resignation in May 2018 in a statement and letter to President Trump.

When Roisman took his seat in September, REG BI had already been in consideration for several months, but he could help shape the rules final version.

Lundy, who had a chance to meet Roisman during his first month as commissioner, said all of the commissioners have been “very diligent and thoughtful” about issues like Regulation Best Interest.

When Lundy last saw the commissioners, Lundy said, Regulation Best Interest was still a while off.

“They had a lot of work to do,” he said. “I think that may impact the timing, affording Commissioner Roisman time to get up to speed.”

FINRA & The SEC

Last year, FINRA announced that it would not pursue separate and distinct rules regarding best interest/suitability standards. Instead, FINRA it will either create a new suitability standard, make changes to the current standard to better align with the SEC’s Regulation Best Interest rule or adopt Regulation Best Interest as its rule.

“I’ll be surprised if it’s the latter,” Lundy said. “FINRA typically likes to have a rule book that has rules applicable to its member firms. So, I think, in all likelihood, that they will try and tailor some sort of rule that is consist with REG BI and whatever that looks like.”

DOL Impact & Appeals

The new Congress has pressured the SEC to add the word “fiduciary” to Regulation Best Interest, but Lundy believes that the SEC’s proposal will more closely resemble the Investment Advisers Act standard than the DOL fiduciary rule.

Regulation Best Interest, in its current form, stops short of using the word “fiduciary.” Lundy said he “wouldn’t be surprised if it moved closer to that” due to pressure from Congress and pro-investor groups.

While predicting that the SEC will move REG BI closer to a uniform standard, Lundy said commissioners will strategically stop short of a fiduciary standard because of the potential for appeals.

“Parts of the DOL rule were struck down by appeal,” Lundy said. “I think the SEC is trying to find the right balance, to do the right thing for investors, but also with one eye on being able to defend the rule from a challenge.”

What REG BI Might Look Like

In 2018, The SEC gave a 90-day comment period for financial professionals, investors and special interest groups to offer their thoughts on Regulation Best Interest. It is unknown if and what changes from the comment period will be implemented on a final ruling.

However, challenges from the newly elected Congress could reshape it.

“They are looking for REG BI to look more similar to a fiduciary standard,” Lundy said.

The SEC has been trying to avoid the word “fiduciary” since the Department of Labor’s fiduciary rule was thrown out last year. REG BI is not a uniform standard the way the DOL rule was previously.

“There is a convergence of the standards. I think both sides – industry and investor- are unsure of what that convergence means,” Lundy said. “I think the industry thinks it is converging too much and the investor side thinks it is not enough. Maybe that means it is the right landing point.”

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.