July 15, 2021
The SEC has been intense about ESG and wait-and-see on Reg BI. But new Enforcement Director Gurbir Grewal supported New Jersey’s fiduciary rule and may put teeth in the broker advice standard.
If you’re into sustainable investing, you must be thrilled with the Securities and Exchange Commission.
In his first three months in office, SEC Chairman Gary Gensler has given numerous speeches about the importance of environmental, social and governance factors in the investment climate. He has put on the SEC’s agenda rule proposals on climate risk and human capital reporting.
But if you’re into investment advice reform, you may be feeling a bit neglected by the SEC.
Regulation Best Interest, the broker advice standard, went into force last June. After more than a year of operating under Reg BI, we don’t know to what extent brokerages have changed their advice practices to ensure that their registered representatives are not placing their own revenue desires ahead of their customers’ interest in investment returns.
The brokerage industry maintains Reg BI is much stronger than the previous suitability standard. Investor advocates asserted that Reg BI was too weak to curb brokers’ conflicts of interest.
It likely will take a good while longer to know who is right.
The measure was the centerpiece of former SEC Chair Jay Clayton’s agenda. Gensler will not rip it up and start over. Rather, he told lawmakers when asked at an online congressional hearing, the agency will use guidance, examinations and enforcement to ensure the rule actually protects investors.
But much remains unanswered about Reg BI. For instance, “best interest” is an amorphous term, and what qualifies as “mitigation” of conflicts remains in the eye of the beholder.
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PUTTING TEETH IN REG BI?
Gensler already has made a major decision that likely will affect how Reg BI evolves. In late June, he appointed New Jersey Attorney General Gurbir S. Grewal to head the agency’s Division of Enforcement.
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In selecting Grewal, Gensler went in a completely different direction. Grewal has served as New Jersey AG for more than three years. Previously, he was a county prosecutor and an assistant U.S. attorney. He only worked in private practice for about seven years.
If the effectiveness of Reg BI depends on how it’s enforced, Grewal is uniquely qualified for the job. He was New Jersey AG when the state’s Bureau of Securities, a part of the AG’s office, proposed a fiduciary rule. State regulators said they needed to pursue their own advice standard because they didn’t have confidence in Reg BI.
Grewal’s support was instrumental for pushing ahead with New Jersey’s fiduciary rule, said Laura Posner, a partner at Cohen Milstein Sellers & Toll. A final rule has not yet been released.
“I believe he understands [investment advice] issues well and will not shy away from enforcing Reg BI to the fullest extent possible,” said Posner, who served as chief of the New Jersey Bureau of Securities before Grewal was AG but worked with him when he was an assistant U.S. Attorney. “I know him to be incredibly smart, conscientious and not afraid of a fight.”