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Stock Analyst Update

What New SEC Rules Could Mean for the Financial Sector

We are maintaining our fair value estimates for financial firms as the U.S. moves closer to a best interest standard.

We believe the degree of enforcement by the U.S. Securities and Exchange Commission, or SEC, will be a key factor in determining whether its newly proposed “Best Interest” rules package will be as (if not potentially more) transformative for the financial sector as the Department of Labor’s, or DOL's, fiduciary rule has been. The SEC’s regulations are in a public comment period, while the DOL’s rule is in stasis as everyone waits to see if the government appeals a federal court ruling vacating the regulation. While neither rule is set in stone, it's nearly definitive that the U.S. will have some form of best interest standard. We are currently maintaining our fair value estimates and moat ratings for affected firms, but will update our views as regulations solidify.

While the SEC's Regulation Best Interest overlaps a lot with the DOL rule, there are two major areas of difference. The first is that the SEC's rule will cover those providing recommendations to both taxable and retirement accounts, while the DOL's rule only covers retirement accounts. Taxable account assets managed by financial advisors is often times two to four times greater than their IRA assets. The second is that the SEC will be the enforcer of its regulation, while enforcement of DOL's rule relies on class action lawsuits via the Best Interest Contract Exemption, or BICE.

While many in the financial services sector would applaud less exposure to class action lawsuits, the enforcement actions of the SEC could be more costly. The DOL's BICE allowed firms to include a waiver of punitive damages in their contracts, so class action lawsuits would only be for restitution, or enough to make investors whole. SEC enforcement, on the other hand, tends to include both restitution to harmed investors and penalties, which is something wealth management firms may not have considered. During the past two years, the SEC has imposed approximately $2 billion in penalties through its enforcement actions.

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