The SEC’s decision not to expressly preempt state fiduciary rules with its Regulation Best Interest has left the door open to interpreting which rule trumps the other.

Mike Pedlow, chief compliance officer of Kestra Financial, discusses with FA-IQ how firms may navigate the current regulatory environment.

FA-IQ: What would be your biggest takeaway and views on Reg BI?

Mike Pedlow

Pedlow: I don’t think most of it was terribly surprising. It’s pretty well in line with what was initially proposed, as far as I can tell so far, and I haven’t gone through all 700 pages [as of Thursday afternoon]. But it seems like there is some additional clarification that I think will be helpful, so I’m encouraged because I think it is a good direction. I definitely wouldn’t count this as, ’Hey, we’ve solved all the problems in the industry.’ But I think directionally, we’re moving in the right way.

The biggest takeaway or thing I was hoping I would see that I didn’t is, I was really hopeful that Reg BI would end up being our national standard, and it would preempt a lot of the state rules that have been popping up. That is important to our industry because it’s very, very difficult to have all these piecemeal regulations that we have to be responsible for. That’s really tough to manage for any firm that has advisors in more than one state.

But it seems, at least so far, it’s fairly clear that’s not the case. The states will still have the ability to have their own fiduciary standard and rule set and that’ll be in conjunction with Reg BI. What that ends up doing to firms like us is we have to either build a rule set that kind of plays to the strictest of all of the rules that the states put out or we have to act differently depending on which jurisdiction we’re operating in. Either one of those is very difficult to navigate, and I think the end-client ends up losing as a result of that.

FA-IQ: In what ways does Reg BI increase compliance burdens, and how much could it cost?

Pedlow: I can’t answer the cost question yet; it’s just too early. So the compliance burden that we’re going to face? The easiest of those burdens is we have to go build the Form CRS. But the good news is it’s going to be a lot like our ADV. We already have a lot of that language of what our conflicts are and how we’re mitigating them pulled together.

FA-IQ: Once both the New Jersey rule and Reg BI are in effect, which rule will supersede the other? How do you see this playing out?

Pedlow: I think from a straight regulatory perspective, New Jersey will supersede for New Jersey residents over Reg BI because I think that New Jersey’s proposed rule appears to be a little more stringent than Reg BI in some of the aspects. But Reg BI will supersede the New Jersey rule in some other aspects, such as the disclosures. I think the question firms have to ask themselves is ‘Do you want to apply kind of a New Jersey and Reg BI standard across your firm?’ I think most firms are probably going to do a hybrid where you’re sort of complying with New Jersey and Reg BI in one fell swoop because it’s just not practical to do otherwise.

FA-IQ: As more states come up with their fiduciary rules, would firms look at doing multiple hybrid models or do you see this going before the courts, with the courts prescribing a common standard?

Pedlow: I hope it does go to the courts and we get one standard. My two big worries as a CCO are cybersecurity and a fractured regulatory environment. It will make it so that it is very expensive to dispense advice, and only the most wealthy in the United States will get it if we end up having to comply with 50 different rule sets. I think we have to get to a place that applies a standard that we can live with across the board, and we’re probably going to have to get there through the courts.

This interview has been edited for clarity and brevity.