Investment Professionals

As Implementation Moves Forward on Reg. BI, Department of Labor is Expected to Extend This Weak, Industry-Friendly Standard to Retirement Accounts

Workers and Retirees Will Lose Vital Protections, Pay a Heavy Price

Washington, D.C. — With the 2nd Circuit U.S. Court of Appeals having upheld Regulation Best Interest (Reg. BI) in a decision issued late Friday, the SEC’s new standard for broker-dealers will take effect as scheduled on June 30th. Worse, with that legal hurdle cleared, the Department of Labor is expected to act quickly to extend this weak, industry-friendly standard to retirement accounts, depriving workers and retirees of vital protections against conflicted retirement investment advice.

“Reg. BI combines a vague and undefined ‘best interest’ standard with minimal restrictions on incentives that encourage and reward harmful advice. It’s a toxic combination,” said CFA Director of Investor Protection Barbara Roper. “Investors and retirement savers deserve real protections, not this sham, which was drafted to preserve industry profits not protect investors.”

  • BI does not require brokers to recommend the investments they believe are best for the investor.

 Investors are likely to be misled by the new regulation’s “best interest” label into expecting protections the rule does not deliver. When investor advocates urged the SEC to clarify the meaning of best interest – by making clear that brokers must recommend the investments and investment strategies they reasonably believe are the best match for the investor from among those they have available to recommend – the industry strenuously resisted and the SEC caved to that industry pressure. As a result, it’s not clear the new standard is any higher than the old suitability standard that Reg. BI replaces. Certainly, the SEC has steadfastly refused to state how Reg. BI is stronger than suitability and what practices, if any, that are permitted under the old suitability standard would be prohibited under Reg. BI. “It would be a major watering down of ERISA’s fiduciary standard to accept this best-interest-standard-in-name-only as a substitute,” Roper said.

  • The rule does little to rein in harmful conflicts.

 The broker-dealer business model is rife with conflicts of interest, and Reg. BI does little to rein them in. While brokerage firms must “mitigate” (i.e., reduce) conflicts of interest that operate at the sales rep level, it’s not clear how extensive that “mitigation” has to be. Here again, when investor advocates urged the SEC to make clear that mitigation has to be sufficient to prevent the conflict from inappropriately influencing the recommendation, the industry resisted and the SEC caved. The SEC wouldn’t even prohibit brokerage firms from artificially creating incentives that encourage and reward recommendations that are not in the investor’s best interests. “ERISA seeks to eliminate conflicts that could taint recommendations. Reg. BI doesn’t even come close,” said CFA Financial Services Counsel Micah Hauptman. “There’s no way DOL can reasonably adopt a rule based on Reg. BI as satisfying fiduciary obligations under ERISA.”

“The Trump administration has been pushing the exact policies that Wall Street has been asking for,” Hauptman continued. “In fact, DOL Secretary Eugene Scalia has represented the same Wall Street firms who are the running the show on policy with these rulemakings,” added Hauptman. “The predictable result is a rule that puts industry interests over investor interests, and vulnerable workers and retirees will pay the price.”


Barbara Roper, 719-543-9468

Micah Hauptman, 269-939-1004