Securities Regulation Daily Peirce talks Regulation BI at broker-dealer outreach program
Friday, June 28, 2019

Peirce talks Regulation BI at broker-dealer outreach program

By Amanda Maine, J.D.

The outspoken commissioner also discussed the SEC’s enforcement efforts and called on the Commission to reexamine its accredited investor definition.

SEC Commissioner Hester Peirce sat down for a conversation with Joel R. Levin, director of the SEC’s Chicago Regional Office, at the SEC-FINRA National Compliance Outreach Program in Chicago. Levin asked Peirce about a number of SEC developments, including the Commission’s recently adopted Best Interest standard, the priorities under the SEC’s enforcement program, and the role of OCIE.

Regulation BI. Much of the conversation, understandably, centered on Regulation Best Interest (Reg BI), the SEC’s new broker-dealer standard which was approved on June 5 by a 3-1 vote. Peirce, who voted to approve the new standard, noted that Chairman Jay Clayton had made adopting a new standard a priority because the issue has been talked about for decades. She observed that there is an aggressive implementation timeline for Reg BI and encouraged people to reach out to the staff with questions to help inform an eventual Commission guidance or FAQs. The standard itself isn’t difficult, she said, but thinking about how it will apply in certain situations is.

Levin asked why the SEC decided against adopting a single standard for both broker-dealers and investment advisers. Peirce said that some people have criticized the new standard as being watered-down, but she advised that in reality, people were not being honest about what the standard was before Reg BI. She hopes that the staff will put out a chart that lays out the broker-dealer standard and the investment adviser fiduciary standard side-by-side for a quick overview.

A key element of the Reg BI rulemaking was encouraging better communication between investors and financial professionals, Peirce said. Levin asked if Reg BI has changed in a fundamental way the relationship between financial professionals and their clients. Peirce replied that a lot of financial professionals are already doing what is required by Reg BI, but the standard will now allow the SEC to bring enforcement actions against people who are not doing the right thing.

Levin noted that some states have come up with their own fiduciary standards and asked Peirce whether they were preempted by Reg BI. Peirce said that the Commission didn’t preempt the states but that she does worry about conflicts that may arise with several different state standards and a federal standard. It is possible that there will be problems if the states move forward with their own fiduciary standards, she cautioned.

Enforcement. In response to a question from Levin about the SEC’s enforcement program, Peirce said that she doesn’t like to describe the Commission as a law enforcement agency because it is a regulatory agency. However, she added, you can’t have a regulatory agency if no one enforces the rules. The SEC’s enforcement program is important for market integrity, she said. People need to feel safe going into the marketplace without fearing that there is someone around every corner trying to rip them off, Peirce advised.

Levin asked about areas of enforcement in which the Commission has been more active lately. Peirce noted that Chairman Clayton has made retail investors a priority, and the enforcement program’s priorities reflect that by pursuing retail investor fraud. She added that it is easy to be distracted by the "big shiny object" cases that have big dollar amounts and big names, but the Commission is also bringing cases with much smaller dollar amounts, such as pursuing financial professionals who steal customers’ money to spend on themselves. The dollar amounts in these cases aren’t big, but they are still very important, Peirce said.

Levin also asked about the role of the chief compliance officer in the broker-dealer and investment adviser industries. He observed that CCO is a difficult job with a lot of responsibility, and inquired how the Commission can ensure that the CCO will take the job seriously without discouraging people from becoming a CCO. Peirce said she wanted to empower CCOs to do well and firms to make sure the CCO does more than "have ‘CCO’ on their door." She urged industry participants to come forward and talk to the SEC about anything that would discourage qualified people from taking a CCO job.

OCIE. Replying to a question from Levin on the role of the Office of Compliance Inspections and Examinations (OCIE) in fulfilling the SEC’s mission, Peirce hailed OCIE as being on the frontline of the agency. OCIE staff interacts with firms and establishes relationships with them. The compliance function of the SEC is one of its core functions, and it is important for the staff to do outreach to learn how the Commission’s rules are affecting the industry, she explained.

Accredited investors. Peirce criticized the SEC’s accredited investor regulations, stating that they are not consistent with letting people make the most of their own lives. If it were up to her, she would eliminate them altogether. The rules basically tell people, "the SEC thinks you’re not smart enough to manage your own money," she said. However, she admitted that the SEC would probably not eliminate the rules, but she would favor expanding what the SEC considers to be factors of a "sophisticated" investor beyond income and wealth. She urged people to read the SEC’s recent concept release, which, among other things, requests comment on the SEC’s accredited investor definition.

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