The SEC’s Reg BI Package: Time to Vote

On May 23, 2019, the SEC released its Open Meeting Agenda for June 5, 2019, at 10:00 a.m. EST. More than a typical SEC agenda release, this advised that at this meeting the SEC will consider whether to adopt the package that was proposed April 18, 2018, to attempt to reform retail investment standards.

The agenda includes four items. The first three to be considered for adoption are familiar:

• Item 1: Regulation Best Interest – Standard of Conduct for Broker-Dealers
• Item 2: Form CRS Relationship Summary
• Item 3: Standard of Conduct for Investment Advisers.

The fourth item—Interpretation of “Solely Incidental”—was not part of the April 18, 2018, proposals and therefore was not put out for comment. This new agenda item references Section 202(a)(11)(C) of the Investment Advisers Act of 1940. The reference to this provision involves a potential registration exemption for broker-dealers if their advice is “solely incidental” to the conduct of their business as a broker-dealer, and they do not receive special compensation for this advice. Investor advocacy groups have already expressed reservations alleging that this addition to the agenda was unanticipated. Industry groups have countered that this topic was embedded in the proposing releases and was the subject of comment letters.

Turning back to April 18, 2018, many will recall that Commissioner Kara Stein was the sole vote against the package, and in doing so she offered a scathing dissent. She has since left the Commission. Commissioner Robert Jackson voted for the package, but has raised certain concerns in his public statements at that open meeting and since. Ironically, his term expires June 5. While he can extend his term for another 18 months, it is expected that he will leave the Commission sooner than that. Thus, for a variety of reasons, Commissioner Jackson’s comments and vote will warrant close attention. The SEC is putting forth this rulemaking package with only four Commissioners—a less than “full Commission”—including one who may be leaving soon. That said, close followers of the developments regarding this package of proposals understand that Chairman Jay Clayton would not have set this agenda unless he anticipated obtaining the votes that he needs for passage.

Drinker Biddle’s Best Interest Compliance Team will continue to follow these developments, closely monitor this open meeting, and keep you informed of whether the items are adopted, of any final releases published thereafter, and the impacts therefrom.