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: Welcome to the second part of this discussion and perspectives on the SEC Regulation Best Interests rule, or Reg BI. I’m Wayne Badorf, and this is The Essential Practice podcast.

Let’s get right to it. Carl Tugberk, Head of Wealth and Investment Management Public Policy for Wells Fargo Government Relations, rejoins us. Welcome, Carl.


Carl Tugberk: Thanks for having me.


Wayne: Now of course I want to encourage our listeners to download part 1 of this program, where we covered what the Reg BI rule is and for what purpose it’s intended. Here, in part 2, we’ll start with who this rule applies to. Carl?


Carl: Sure thing, Wayne. So again, as a reminder to the listeners, Reg BI is a component of a larger rule-making package that the SEC previously adopted, and Reg BI itself applies to broker-dealers and creates a new heightened standard of conduct.


Wayne: Carl, is it fair to say that, for many broker-dealers and financial advisors who are registered representatives who are operating under a suitability standard, that this will require them to be much more familiar with what this new care means and how they operate with clients?


Carl: Yes, definitely. So Reg BI is a very transformative new rule that the SEC has put out, and it is definitely elevating the standard of conduct that broker-dealers have to provide their retail customers. That goes above and beyond the existing suitability requirements.


So specifically what Reg BI requires is that broker-dealers provide their retail customers recommendations that are in their best interests and not in the best interests of the advisor or his or her firm. To break that down a little bit more, you know, what does “best interest” mean?  The SEC does not specifically define the term “best interests”, but it says that it can be complied with by satisfying sort of four prongs.


The first of which is a disclosure problem, which requires a broker-dealer, at the time of or before providing a recommendation, disclosing to the retail customer material facts that relate to four things. First, in what capacity is the financial advisor that is serving the retail customer acting? Are they a broker-dealer? In this case, since we’re talking about Reg BI, yes, they would be a broker-dealer and they’re not acting as an investment advisor. They would also have to disclose the material costs. So basically the basis for that financial advisor and the firm’s compensation. And then they would also have to address the type and scope of services that they will be providing, including any limitations in terms of investment offerings that may be available to that retail customer. And then finally they’ll have to disclose material facts relating to conflicts of interest.


The other three prongs include a care prong, which requires the broker-dealer to use reasonable diligence, care, and skill in providing recommendations to their retail customers. So when you unpack this a little bit more, it essentially requires a broker-dealer to understand the risks, rewards, and costs of the recommendations that they’re making to their retail customers. This is where there will be some familiarity for financial advisors in that sort of embedded in this care prong is many of the same elements of the existing suitability prong in that the recommendation that’s being made needs to be in the best interest of at least some retail customers. It needs to be in the best interest of a particular retail customer given that customer’s investment profile. And then where there might be a series of transactions involved, the series as a whole needs to be in the best interests of that customer.


Next, the last two prongs basically require broker-dealers to have certain policies and procedures at a more granular level. There are policies and procedures required to identify and address certain conflicts of interest. And ultimately, they need to be addressed by requiring disclosure or the mitigation or elimination of those conflicts of interest. So as an example broker-dealers are now going to be required to eliminate sales contests which create a conflict between their interest and their customers. And then lastly as a sort of backstop prong to the Best Interest standard is the requirement that broker-dealers have policies and procedures in place that are reasonably designed to obtain compliance with the rule.


Wayne: So Carl our audience, our podcast audience, is comprised of investment professionals—financial advisors some within large firms like Wells Fargo. Some are independent. And some might be registered investment advisors. I’m sure that for many that are part of large firms those firms will provide interpretations of the rule and provide them with instruction, but others may be left to figure it out on their own, so to speak. Is there a place that advisors can go to at the SEC to get more information about the rule and maybe even the broader context of the rule-making package, so they can begin to understand this more fully?


Carl: Yes, the SEC has definitely thought about this in light of the fact that this is such a sort of landmark regulation and there will be such significant change, certainly to the broker-dealer side of the industry, in terms of complying with this this new standard of conduct.


So in order to assist firms with planning for compliance with the new rules, the SEC has established an inter-divisional standards of conduct implementation committee that is comprised of staff from across the entire SEC, and they encourage firms to actively engage with this committee and ask questions as they arise in planning for implementation. And the SEC has provided an email address for this group, which is:


Wayne: Carl, terrific, and thank you so much for your insight today. You know, before we wrap up, we ended up jumping right into this topic of the SEC package, and Reg BI within it, and we didn’t really talk about your role and the role of your team at Wells Fargo. And we have certainly been the beneficiary of your perspectives here in part 1 and part 2 of our podcast. But when you’re asked to talk about your team, what do you tell people?


Carl: Sure. Well, thanks for asking, Wayne. And yes—I’m the head of wealth and investment management public policy, which is a part of a larger public policy team that ultimately is a part of the larger government relations and public policy group in Washington D.C. And in a broad sense that group is intended to provide Wells Fargo with a presence in Washington to engage with legislators, regulators, and to sort of have boots on the ground to understand what’s happening in real time in that landscape.

But more specifically to my role as the head of wealth and investment management public policy, my role is to work with our businesses, our lawyers, compliance professionals, and other subject matter experts in assessing, you know, potential public policy issues that come through legislation or regulation and will have an impact on those businesses and leading the development of what the Wells Fargo public policy positions should be on those issues.


So, for example, since we’re talking about Reg BI today, which is now an adopted rule, certainly when that rule was proposed, my group would have been heavily involved with working with the folks in the businesses and in those other functions to assess the proposal and determine how Wells Fargo views it.


Moving forward as it relates to Reg BI, you know this is an important development in the broader regulatory landscape for the standard of conduct applicable to broker-dealers and investment advisors, as some of your listeners may know, or many of them, there are other initiatives that are happening at the state level. The Department of Labor is intending to do some type of rulemaking later this year which will hopefully be more of a complement to the SEC package. But this is a sort of constantly evolving regulatory landscape that that my group, and myself in particular, is focused on. And so we’ll look forward to working closely with our Wells Fargo team members on those initiatives going forward.


Wayne: Well Carl, let me just say we certainly appreciate you spending time with us today and sharing your insights from Washington and on this new rulemaking decision from the SEC. Thank you so much for joining us.


Carl: My pleasure Wayne. Thank you very much for having me.


Wayne: And to our listeners as always connect with your partner here at Wells Fargo Asset Management for more insights, service, and support. Until next time I’m Wayne Badorf. Thanks for listening to The Essential Practice podcast.


403663 0719


One thought on “Perspectives on SEC Regulation Best Interest rule—Part 2

Comments are closed.

You might also like: