A major Wall Street trade organization is discouraging the Securities and Exchange Commission from creating new regulations targeting the online practices of financial advisers.
The agency can turn to the broker standard of conduct, Regulation Best Interest, if it determines that online brokerages have provided investment advice, said Kenneth E. Bentsen Jr., chief executive of the Securities Industry and Financial Markets Association.
“We think Reg BI gives the SEC all the tools and authority that it needs where it views digital engagement as having a form of recommendation,” Bentsen said during SIFMA’s online year-end review briefing.
His remarks about so-called digital engagement practices, or DEPs, echoed the argument SIFMA made in its comment letter in response to the SEC’s request for public input on oversight of the area.
The SIFMA letter acknowledged concerns that the SEC and others have raised that DEPs can encourage investor behavior — such as frequent trading or buying options and other complex products — that is not in their best interests.
The organization said such conflicts of interest can be addressed through current securities laws.
“DEPs are already subject to the same compliance and regulatory obligations that the firm owes with respect to every other communication or engagement with a client, including full disclosure of all relevant risks,” SIFMA managing director and associate general counsel Kevin Carroll wrote in an Oct. 1 comment letter. “In our judgment, the existing federal securities laws and regulations, and FINRA rules, are sufficient to fulfill the SEC’s investor protection and market integrity missions with respect to DEPs.”
SEC Chairman Gary Gensler has said the agency will assess whether digital “psychological nudges” constitute investment recommendations governed by Reg BI. Such a determination is likely to draw stiff resistance from Robinhood Markets Inc. and other online brokerages because it would increase their compliance burden.
When asked whether digital nudges are advice, Bentsen didn’t answer directly about the nudges themselves. He reiterated the SEC should use Reg BI and rather than developing a new rule in this area.
“If it is deemed by the regulators to be a recommendation in giving advice, then it should be subject to Reg BI,” Bentsen said. “The regulators have all the authority they need to do that.”
SUPERVISION FROM A DISTANCE
On another topic later in the event, Bentsen said SIFMA is working with securities regulators to develop a new regulatory approach to supervision as financial firms make remote working a permanent part of their operations.
When it comes to online supervision, SIFMA is urging the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, to extend further a rule allowing remote office inspections. Earlier this fall, the SEC approved a Finra rule that allows remote inspections to continue until June 2022.
SIFMA would like to see remote supervision become a permanent part of the regulatory landscape as more brokerages are deciding to operate at least partially on a remote basis for the foreseeable future.
“We are in discussions with Finra, the SEC and the state regulators about moving beyond the temporary relief to what should the regime look like in a permanent remote working environment,” Bentsen said. “Firms tells us there will be some positions that will be either a hybrid arrangement or a permanent remote arrangement. How do we develop the systems to make sure examinations can be conducted in that environment?”
Firms are ready to make that move.
“We can supervise appropriately from distance,” said Thomas Pluta, global head of linear rates trading at J.P. Morgan Chase & Co. and SIFMA chairman.
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