What brokers owe their retail customers has been a topic of official hand-wringing for -- well, it seems like forever. The SEC dithered on the issue for years. Only when the Department of Labor threatened to impose its own 1,000-page fiduciary duty rule on anyone who advised retirement funds did the SEC roust itself. Earlier this month, the SEC finalized a suite of Rules, Releases and Interpretations. It's a weighty effort. The weight of three reams of paper, at least. And it all comes under the rubric of a catchy name - Regulation Best Interest -- BI for short. https://www.sec.gov/rules/final/2019/34-86031.pdf

The conventional wisdom is that investment advisers are fiduciaries while brokers are mere agents. Advisers are obliged to put the customer's interests ahead of their own, while brokers only have to follow their customer's instructions. If brokers "recommended" securities to their retail customers, those recommendations need only be suitable for the customer, based on what the customer tells the broker about their investment experience and goals. The conventional wisdom lets brokers insulate themselves from the ire of losing customers, by blaming losses on the customer's own stupidity. It was at least pleasant for them to think they could.

I don't know if this dichotomy ever really worked. One time, perhaps, customers understood that their advisor was rendering quasi-professional financial advice while their broker was a salesman hustling a commission. But brokers couldn't let stand their subordinate status, especially when commissions were deregulated and all the money seemed to be in advising. So, first, brokers got permission to be exempt from having to register as investment advisers if their advice was merely "incidental" to their brokerage functions. Then brokers got permission to call themselves every conceivable permutation of the words "asset," "financial," "wealth," and "investment" in front of "adviser," "specialist," "analyst," "planner," and "professional," except "investment adviser." 

Small wonder, then, that surveys going back over 20 years have all found that retail customers can't distinguish between investment advisers and brokers. Certainly today no retail customer understands that his legal rights against his financial adviser are technically more limited than his rights against his investment adviser. He thinks they are all the same. Which was the point of the name game all along!

You can be forgiven for thinking that the solution to this "problem" would have been to have the law follow the facts. Brokers might have been rewarded for having successfully made themselves indistinguishable from investment advisers in the public mind, by imposing on them the same duties toward customers that investment advisers had. Nah, way too easy. And too dismissive of the lobbying efforts of the big broker-dealer firms who have long been used to having their cake and eating it too, and their customers' as well. 

And so, Reg. BI does not require brokers to put their customers' interests first, and this was the main reason SEC Commissioner Robert Jackson voted against the whole package. https://www.sec.gov/news/public-statement/statement-jackson-060519-iabd. Instead, it micromanages a broker's obligation, requiring the broker to disclose actual and potential conflicts to retail customers, and to ascertain, in recommending individual securities and an overall investment strategy, that those are in the customer's "best interest."

Customer's interest first, customer's best interests -- is this just semantics? If there's no difference between those two concepts, the SEC would have saved us all a lot of paper by just saying that brokers and advisers are subject to the same standards. The SEC, and the industry that lobbied for the distinction, must think it makes some difference. 

Admittedly, Reg. BI does improve on the old suitability standards, but in a very abstract way. There is always a theoretical universe of things that are "suitable" for any given customer. Plain English suggests that there can only by one "best" thing. But whether an investment that puts the customer's interest first is different than one that is in the customer's best interest seems to me like counting angels on the head of a pin. I don't think there is a real difference. But then, I don't think Reg BI will make any difference in the real world anyway, not for customers at least.

Calling someone an agent rather than a fiduciary was always a fool's errand, because agency law itself is a mushy topic. What is agency, anyway? Here's the long accepted definition, from the Restatement of Agency, the closest we've got to an authority:

And there's the problem. Agency is a fiduciary relationship all along, which makes the age-old debate between broker/agent and adviser/fiduciary largely illusory. Agency law is not very well understood; it's not as easy as people think. See. https://scholarship.law.umt.edu/cgi/viewcontent.cgi?article=1408&context=mlr. There still isn't an accepted theory that unifies the whole field. See https://lawreview.law.pitt.edu/ojs/index.php/lawreview/article/view/164/164. But no matter for our purposes. Call it agency, call it fiduciary, call it what you want. In all cases, you have one person (the broker or adviser) serving another (the customer). The person being served must always be served properly, and cannot, under any theory, be taken advantage of. Arbitration panels know this, which is why no retail broker who has screwed a customer has ever gotten off by claiming he did not have to act in the customer's best interest. In that regard, Reg BI does no more than codify what arbitrators have always done, and I don't doubt will continue to do.

But if Reg BI has no practical relevance to customer protection, who is it for? Reg BI certainly will make a difference to securities lawyers and compliance professionals. They now have a whole new set of rules to parse and policies and procedures to create. By my rough count, Reg BI should impel firms to document their compliance with 14 data points whenever they make a recommendation, all to ensure that they have a robust defense to injured customers by trying to prove that they did everything Reg BI required. Reg BI could well be yet another legal and compliance full-employment act.

The next step in this process will be for the industry to come up with a set of "best practices" that will become the de facto norm. I'm guessing these standards will be met with a lot of phony lamentation by large firms who are already close to meeting them. Were I a cynic I'd quote you a line from Jeffrey Rosen's intellectual biography, Louis Brandeis: American Prophet: "Brandeis understood the likelihood that federal officials who are given broad discretion to regulate the financial industry will be successfully defanged by the lobbying power of our financial oligarchy." Or this from Paul Mahoney's Wasting a Crisis: Why Securities Regulation Fails: "[F]inancial firms are adept at using legislative and regulatory processes to disadvantage their existing or potential rivals . . . ." Reg BI and the "best practices" it spawns may not matter to individual customer cases. But large firms will easily manage those regulations and practices, while small ones will have to spend a larger share of their profits to meet them. If I were a cynic, I would suggest that Reg BI is yet another example of the large-firm-controlled industry coopting the SEC to help entrench them against their smaller rivals. Yes, I would suggest that -- if I were a cynic.

Bob Dylan, as usual, gets it righter than most: Everyone -- absolutely everyone -- has to serve somebody. Brokers and advisers, call them what you will, have to serve their customers. But regulators, too, have to serve somebody. If not the customer, then who? It may be the devil.