The Regulation Best Interest rule overseeing how financial advisers make recommendations to clients cannot be treated as a “check the box” exercise, Securities and Exchange Commission Chairman Gary Gensler said at the Financial Industry Regulatory Authority’s annual conference on Tuesday. He discussed Reg BI and Reg BE, as well as artificial intelligence and what each means for advisers and broker/dealers.
Gensler took the chance to reiterate the SEC’s views on Reg BI to the audience of financial sector players just a little less than a month after the regulator put out renewed guidance on Reg BI that calls for advisers to gain a more detailed understanding of their clients and for ensuring a broad array of investment options. On Tuesday, Gensler emphasized that advisers need to look at “more than suitability” and consider all costs and alternatives to be sure their advice is truly in their clients’ best interest, not merely an acceptable recommendation.
The SEC head also made comments about the Regulation Best Execution rule, an SEC proposal made in December 2022 to establish a regulatory framework for the best execution of securities trading for brokers and dealers. FINRA President and CEO Robert Cook, asked Gensler why it was necessary for the SEC to propose a new Reg BE when FINRA, a non-profit overseen by the SEC, already has one.
Gensler responded by saying that Reg BE “is far too fundamental an area” for the SEC to not have it on its books. The SEC, as part of the “official sector,” should have its version of Reg BE and not “rely on a self-regulatory organization,” he said, adding that he was surprised the SEC did not already have such a regulation when he first joined the SEC.
During the conversation with Gensler, Cook recommended that listeners refer to SEC staff bulletins on Reg BI. These include one on conflicts, which highlights the need to mitigate conflicts and not just disclose them; and another on the Care Obligation, which urges advisers to consider the unique needs of each client and carefully consider alternatives.
At the Washington, D.C.-based gathering, Gensler also weighed in on the potential use of artificial intelligence in financial advising and how such development would be regulated. The SEC head said that predictive AI can help optimize a client’s best interest and can bring greater access to advice and offerings, but that implementation will depend on how the AI is programmed and trained. There are many factors that go into optimal investment advice, and if an AI platform is made to help a brokerage or adviser, then that can introduce new conflicts of interest, Gensler said.
There are currently no proposals to regulate AI, though the chairman did discuss the perils and potentials of AI at a hearing hosted by the House Committee on Financial Services in April, saying that the key regulatory interest in AI is from the perspective of a fiduciary—making sure the technology advances a client’s best interest.
Lastly, Gensler discussed the four market structure proposals that the SEC has brought forward during his tenure, which cover a broad range of issues in the equity markets and include Reg BE. Gensler referred to the proposals as an “important set of initiatives.” He said that the previous update of equity markets was in 2005, and economic and technological changes justify the proposals made in December 2022.
Tags: FINRA, Gary Gensler, SEC