Carl Tugberk, Head of Wealth and Investment Management Public Policy for Wells Fargo Government Relations & Public Policy, provides perspectives on “Reg BI” for advisors.

 

Wayne Badorf: We’re discussing the SEC’s Regulation Best Interest rule—Reg BI—what it is, what does it contain, who does it apply to, and what might it mean for advisors. I’m Wayne Badorf and this is The Essential Practice podcast.

 

We have a special guest joining us. He’s Carl Tugberk, Head of Wealth and Investment Management Public Policy for Wells Fargo. He’s right there where the action is in Washington D.C., and he’s been tracking this Reg BI story as it progressed and keeping those of us within Wells Fargo informed. Carl’s agreed to share his perspectives with you, our advisor audience. Carl, thank you, and welcome to our podcast.

 

Carl Tugberk: Thank you, Wayne. I’m happy to be here and share my insights on this monumental rule-making by the SEC.

 

Wayne: And Carl, maybe it’s important to us to start by just talking about that Reg BI. It was actually part of a larger rule-making package by the SEC. And maybe to open it up we can just have you speak for a few minutes to the broader rule-making from the SEC and the Reg BI part of that rule-making.

 

Carl: Yes, certainly. So Reg BI was one of four key components to an advice standards package that the SEC adopted this past week, which included Reg BI, which is the standard of conduct now applicable to broker-dealers. It included an interpretation that codifies the standard of conduct, a fiduciary duty that has been applicable to investment advisors for many years. And a new Form CRS, for Customer Relationship Summary, that both investment advisors and broker-dealers will be required to disclose to their customers. And lastly, an interpretation that codifies an exclusion from investment advisor registration for broker-dealers when providing certain types of advice.

 

Wayne: I wonder, you know, as we think about this rule-making, and certainly Reg BI’s part. SEC Chairman J. Clayton had a few things to say on Wednesday, June 5 when the rule became official. And Chairman Clayton said that the Reg BI “solidified” his view that it has “the right framework for conduct for broker-dealers.” He went on to say that the SEC took “the right approach” in that he believes Reg BI “incorporates fiduciary principles appropriately tailored to the business model used by the broker dealer.” So let’s unpack some of those statements. I wonder if we can. What are your thoughts on that?

 

Carl: Yeah, well, I think what’s at the core of Chair Clayton’s statements is really that there are two distinctly different business models here for providing financial advice and investment advice to retail customers who have a variety of different needs, which justify sort of the differences in those models. And so you know the concept of the idea that there’s a one size fits all approach, you know, for instance, adopting a uniform fiduciary duty for both broker-dealers and investment advisers, I think Chair Clayton and the SEC have made it clear that they don’t believe that will work. And that ultimately, really, what is the real driver behind that is that you have different investors with different needs and different sort of investment profiles which, you know, it’s important to allow them access and choice in determining what type of advice and how they pay for it suits them best.

 

Wayne: I wonder if it’s helpful to take a step back, and thinking about the idea of a Best Interest standard implies that there’s a problem that the SEC is trying to solve. What would you say is that problem they’re trying to solve for, and can you distill that down for our audience?

 

Carl: Sure. Well, I think there’s really two things. The first is, I think there’s been a fairly long held belief that there needs to be a review of the standard of conduct applicable to broker-dealers, and many would argue that it needed to be heightened or increased. So in 2010, as part of the Dodd-Frank Act, Congress authorized the SEC to study and examine this issue to take a close look at this standard of conduct applicable to broker-dealers under existing regulations as well as the standard of conduct applicable to investment advisors and gave them the authority ultimately to review and amend that standard all the way up to and including the fiduciary duty, you know, if that is what the SEC determined was the appropriate action to take. So I think first and foremost this rule is kind of the culmination of that process in which the SEC has made an assessment that the standard did need to be heightened or increased. And so that’s what this is doing by creating the Best Interest standard.

 

Secondly, I think there’s been a problem of investor confusion in terms of, you know, who is the financial professional that is providing them advice, in the sense of what role are they playing? Are they a broker-dealer? Are they an investment advisor? I think it’s been noted that it’s been very hard for investors to know what the difference is and what type of advice they’re getting and, sort of, what is the standard that is coming with that advice. And so ultimately one of the other parts or components of this advice standards package is the Form CRS—again, Customer Relationship Summary—that is really intended at distilling, in a very succinct, plain English fashion, you know, what role the financial advisor is playing. Are they a broker-dealer, or are they an investment advisor? How are they being compensated? Is it a transaction-based compensation model, or is it fee-based based on, you know, assets under management? As well as, you know, highlighting other certain disclosures that are important to that relationship and the nature of it as well.

 

Wayne: Terrific. Carl, let’s pause the discussion for now. And I’d like to let our listeners absorb this great information. And then later in June we’ll release part two of this discussion. Does that sound good?

 

Carl: Yeah, that would be great.

 

Wayne: Until next time I’m Wayne Badorf. And thanks for listening to The Essential Practice podcast.

 

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