While a potential Joe Biden administration is expected to reverse regulations governing financial services, the Securities and Exchange Commission might be off limits.
Although the president has strong influence over the SEC, the agency generally observes a different sense of decorum, said Thomas Selman, founder of Scopus Financial Group and a former vice president for regulatory policy at the Financial Industry Regulatory Authority, or FINRA.
Selman spoke as part of a panel last week at the Insured Retirement Institute Supply Chain Summit. The discussion focused on SEC's Regulation Best Interest, which took effect June 30 and established a best-interest standard for recommendations and product sales by brokers.
To "reverse it right away, it's just not something they have an appetite for," Selman said of the SEC. "Typically, they want to have their own fresh agenda."
The SEC is run by five commissioners, no more than three of which may be from the same political party. The president appoints commissioners, thereby influencing the agency's agenda. If he were to win, Biden would have the opportunity to replace Chairman Jay Clayton, whose term is up next year.
The Democratic platform accompanying the Biden nomination calls for a fiduciary standard to cover all retirement product advice and sales.
Principles Based
Reg BI requires that four factors be considered in developing a recommendation for a retail customer: the customer’s investment profile, potential risks and rewards, and costs. It also includes a new "customer relationship summary" disclosure between broker and customer.
However, a Biden administration might have other tools at its disposal to "have the outcome of Reg BI be a little bit different," explained Bradford P. Campbell, a partner with Faegre Drinker Biddle & Reath.
"One of the big changes here is you're moving from a rules-based regime to a principles-based regime," Campbell said. "So ultimately, the enforcement division is going, to a certain extent, make up some of what the rules actually are in practice."
For example, Reg BI requires brokers to "mitigate conflicts" that arise in the course of recommending a product to a consumer -- a product that might have a higher commission, for instance. But the SEC left the details unclear, Selman said.
"The commission discussed three different ways at least that mitigation might occur and what the purpose of mitigation was," Selman said. "And none of them are very clear.
"I think it'd be very easy not only for the enforcement staff, but the (Office of Compliance, Investigations and Examinations) itself to come in and say basically, 'We're going to impose an incredibly onerous fiduciary type standard, just in the way that you run your firms.'"
'That's A Red Flag'
For his part, SEC Chairman Clayton has said that the agency will not be looking to crack down on firms this year, or while COVID-19 is still a major crisis.
Until the enforcement measures become clearer, brokers and firms need to just "not do dumb things," Selman said. He noted a recent Wall Street Journal story that found a high number of firms were incorrectly disclosing, or failing to disclose, disciplinary actions it had received.
"That's a red flag to regulators," he added.
Idaho Insurance Commissioner Dean Cameron was a key member of a state regulator group that wrote a best interest model law for the National Association of Insurance Commissioners. That model was written to harmonize with the SEC standard.
The best-interest concept is not meant to be a punitive regulation, Cameron said, adding that the compliance measures are pretty straightforward.
"I think the two most important elements for any agent and any carrier is disclosure and documentation," he said. "Those become the key elements to everything."
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.
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