Between the usual holiday season madness and a recent trial, I have been a little tied up lately.  Happily, Chris Seps has stepped up with this excellent piece on Reg BI. – Alan


My young boys will sometimes chase me around the house, catch me, and yell “gotcha” as they drag me off to their pretend jail.  No matter how much I plead that I’ve done nothing wrong, I always end up in jail, despite having no knowledge of any rules that I’ve broken – because they just make it up as they go along.  Unfortunately, it is starting to sound like complying with Reg BI might be a bit like that.

If you’ve paid attention to this blog (or many other commentators out there), you probably know that there is growing concern in the industry that there is simply not enough guidance for broker-dealers to allow them to feel comfortable that they will be in compliance with Regulation Best Interest (“Reg BI”) when it takes full effect in June 2020.  We previously voiced concerns that there are mixed messages coming from the upper ranks at FINRA regarding whether Reg BI will operate in tandem with or in replacement of FINRA’s traditional suitability standards (as set forth in Rule 2111 and various Notices to Members, as compiled into a lengthy set of FAQs).  And yet, FINRA has said it is ready to begin testing firm’s readiness for Reg BI.

To add more fuel to the fire, in the past week, several SEC commissioners have expressed their own concerns that there is not enough guidance to firms on how to comply with Reg BI.  On December 6, SEC Commissioners Allison Herren Lee and Robert Jackson were asked if the agency was going to provide any clarity around “best interest” and what it means to “mitigate conflicts” – two aspects of the rule that do not seem to have any hard and fast requirements.[1]  While Lee stated that she was “hopeful” the agency would provide clarity, Jackson responded with an unequivocal “no,” according to ThinkAdvisor.  Then, when asked whether FAQs would be enough to help guide the industry, Lee reportedly seemed doubtful: “I guess that remains to be seen.  They need clarity.”

If two of the five SEC commissioners are concerned that Reg BI is not clear enough for firms to know how to comply, how exactly are firms supposed to prepare?  With so little initial guidance, we have been telling clients that we will have to see how early enforcement actions shake out to get any real sense of the boundaries of Reg BI.  Unfortunately, that provides little comfort to broker-dealers who are trying to comply with the rule.  In essence, as my colleague Heidi VonderHeide echoed in her recent webinar on Reg BI (which you can find here), the worst thing firms can do is nothing; all you can do is take your best shot, put your head down, and hope for the best.

Commissioners Lee and Jackson seem to agree.  Lee stated that she and her staff are “staying riveted on what they’re [SEC staff is] doing in these early interpretations and these early potential enforcement attempts.”  Jackson echoed that “there are going to be enforcement decisions that will have to be made.”  Jackson said “The bottom line is: How good a job Reg BI is going to be in protecting ordinary people is going to be decided by on-the-ground regulatory decisions in the future. And who’s making those decisions is going to be very important.”

In other words, since Lee and Jackson have little hope for further guidance, and have little hope that FAQs will be sufficient, industry members will just need to wait and watch the department of enforcement bring cases to test the boundaries of the rule and see who they can make examples of to set precedent for the future.  It sounds like two of the commissioners are fully expecting “regulation by enforcement,” or more pejoratively, a game of “gotcha,” right?

Not so fast.  Four days after Lee and Jackson made their comments, SEC Commission Chairman Jay Clayton expressly stated under questioning by the Senate Banking Committee that his agency “should not be in the business of gotcha” enforcement.[2]  At the time, Chairman Clayton was being questioned about the fact that the SEC’s recent mutual fund share class initiative (where the SEC asked advisor firms and broker-dealers to self-report their failure to disclose that they place customers in fund shares paying 12b-1 fees when less expensive fund shares are available) was unfair to the industry because the agency didn’t have a rule on the books that spells out that firms must disclose that they “will” accept 12b-1 fees rather than that they “may” accept them.  In response, Chairman Clayton said: “We should not be in the business of gotcha, but we do need to be in the business of making sure that we enforce our rules.  And if the Commission feels some way about it, we the Commission should articulate it. We shouldn’t be relying on staff guidance.  If there is to be a change in the law or regulation, that should come from the Commission.”

So, while Chairman Clayton hopes that only the Commission will be in charge of “chang[ing] the law or regulation,” it seems inevitable – and accepted by Commissioners Lee and Jackson – that Reg BI will be shaped by “on-the-ground regulatory decisions in the future.”  Those decisions which ultimately will be made by examiners and enforcement personal with, according to Lee and Jackson, little hope of having any further clarity on the nuances of the rule.  In other words, be prepared to hear SEC staff exclaiming “gotcha.”  But unlike when my kids say it, it won’t be fun.

[1] As reported by ThinkAdvisor, at

[2] As reported by Financial Advisor Magazine, located here–regulation-by-enforcement–breaks-into-open-at-senate-hearing-53183.html