From an industry perspective, perhaps no stakeholder holds more sway over the SEC's actions on Reg BI than the Securities Industry and Financial Markets Association. (Photo: Diego M. Radzinschi/ALM)

More than half of all U.S. adults own an individual stock, are invested in a stock market fund, an IRA, or participate in an employer-sponsored 401(k), according to the most recent accounting from Gallup.

By that measure, the investing public is the largest stakeholder impacted by the Securities and Exchange Commission's proposed rules for enhancing investor protections and raising the standard of care required of broker-dealers and registered advisors that serve the retail investment market.

Related: Preamble to SEC best interest proposal may open back door for class actions

But from an industry perspective, perhaps no stakeholder holds more sway than the Securities Industry and Financial Markets Association.

Retail investors have nearly 4,000 wire houses and independent broker-dealers from which to choose. SIFMA's members represent 75 percent of the broker-dealer sector by revenue, according to the non-profit advocacy group's website.

Along with the U.S. Chamber of Commerce and other financial and insurance services trade organizations, SIFMA was a part of the lawsuit that ultimately swayed the U.S. Court of Appeals for the Fifth Circuit to vacate the Labor Department's fiduciary rule.

The organization's posture towards the SEC's proposed Regulation Best Interest, which attempts to place a standard of care on broker-dealer recommendations that exceeds FINRA's existing suitability standard, is considerably more supportive than it was to Labor's fiduciary rule.

“SIFMA has long supported the creation of a heightened best interest standard for broker-dealers across all accounts that builds upon the existing, robust, broker-dealer regulatory regime. We commend the SEC for proposing a new best interest standard that would protect retail investors while preserving retail investor choice,” said SIFMA President and CEO Kenneth E. Bentsen, Jr. in a statement.

Bentsen and SIFMA are calling on the SEC to “swiftly proceed to final rulemaking”–but not without considerable revisions and clarifications to the agency's proposals.

“Certain key changes must be made to the proposals to make them workable for the industry and to avoid unintended consequences, such as decreased choice for retail investors and a shift away from the brokerage model,” SIFMA's comment letter says.

SIFMA is recommending a 24-month implementation period once proposals are finalized.

Here is a look at 10 of the changes and clarifications SIFMA wants to see to SEC's Reg BI, according to its exhaustive 51-page comment letter. The list is by no means comprehensive.

1. No need to define “best interest”

Reg BI requires brokers to make recommendations in the best interest of investors. Consumer advocates and others have criticized the proposal for not defining best interest. SIFMA is not asking the SEC to define the term, because the proposal lays out obligations required to meet a best interest standard through new disclosure, care, and conflict of interest obligations.

2. Further clarity needed on Care Obligation

By SIFMA and others' read, brokers would not have to recommend the cheapest investments to satisfy the care obligation.

But determining how brokers weigh the cost of an investment when meeting the care obligation is “difficult,” says SIFMA.

The organization wants the SEC to provide examples of when recommending the cheapest investment would not satisfy Reg BI.

3. Limiting recommendations to proprietary products

SIFMA reads the SEC's proposal as allowing recommendations from a limited list of a firm's proprietary funds and other product categories so long as that conflict is disclosed to clients. SIFMA is asking the SEC to confirm the accuracy of its reading.

4. Best interest or absolute best investment?

The best interest standard in proposed Reg BI requires brokers to put the interests of their customers before the financial or other interests of brokers or their firms.

But best interest does not mean the “absolute best” investment recommendation, according to SIFMA's read of the proposal.

“The term 'best interest' acknowledges that a broker-dealer will not look at every single possible security, but rather look at the appropriate securities offered on its platform, when making a recommendation,” writes SIFMA.

“Because what is in the customer's best interest inherently involves a level of subjectivity, it is not something that should be assessed with perfect hindsight,” the letter says. SIFMA is asking for validation of its interpretation.

5. Mitigation vs. elimination

Reg BI calls on conflicts of interest to be mitigated when they cannot be eliminated. In the preamble to the proposal, the SEC highlights certain compensation incentives that ought to be considered for elimination.

“The Reg BI Proposing Release contains strong criticism of certain types of financial incentives, and it is not clear how related conflicts may be mitigated without eliminating them altogether,” writes SIFMA.

6. Revenue sharing from recommended funds?

Mutual funds carry differential revenue sharing payments to brokers. SIFMA wants clarification that 12b-1 and other revenue sharing arrangements are not prohibited by Reg BI, so long as material conflicts of interest borne by the payments are disclosed and mitigated.

7. Yea or nay on sales contests

Sales contests that incentivize brokers have come under wide criticism from politicians, consumer advocates, state regulators—and yes, the SEC. According to the criticisms, sales contests incentivize brokers to hit production marks irrespective of investor interests.

The preamble to Reg BI offers a not-so-subtle rebuke of the practice. But SIFMA takes issue that all incentive programs are inherently conflicted.

“We believe such concerns around incentives do not exist with respect to programs that reward asset growth (including non-product specific sales contests) or asset flows, or recruitment bonuses tied to assets under management, total production, or revenue growth because these programs do not give associated persons an incentive to recommend specific securities that may not be consistent with a customer's best interest,” writes SIFMA.

SIFMA does agree that some product-specific sales contests should be eliminated when firms cannot adequately mitigate incentives that are “misaligned with the customer's best interest.”

But even conflicts with product-centric contests can be mitigated with proper oversight, says SIFMA. Under one hypothetical, a firm could incentivize brokers to satisfy customers' best interests through sales contests. Should that option be eliminated?

8. Do unsolicited transactions trigger a breach?

Retail investors may not always listen to brokers. Would a transaction executed by a broker at a customer's demand—even if the brokers suggested against it–trigger a breach of the best interest standard? SIFMA is asking for clarity on transactions marked as unsolicited.

9. When propriety investments cost the same to investors but make more for brokers

A broker recommends a propriety fund that has a similar performance track record and commissions to non-proprietary options, but will also generate more income for the broker and her firm.

Reg BI does not require the lowest cost investment to be recommended. If the proprietary investment recommendation is made in the client's best interest, does is satisfy Reg BI?

10. No restriction on advisor/adviser title needed

Outside of Reg BI, the SEC is proposing to restrict broker-dealers from holding themselves out as “advisors” or “advisers” in their titles in an effort to reduce investor confusion over the level of fiduciary services they are receiving.

SIFMA doesn't see the restriction as necessary. “We believe that Proposed Reg BI solves that confusion as well. Although the proposed best interest standard for broker-dealers is not labeled as a fiduciary one, it clearly has the hallmarks of a fiduciary standard, including a duty of care and a duty of loyalty.”