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Here are the Big Flaws in the SEC’s Best Interest Proposal

By Rita Raagas De Ramos June 15, 2018

A meeting of the SEC’s Investor Advisory Council Thursday showed just how much work needs to be done with the proposed Regulation Best Interest package to reach an acceptable compromise for industry and consumer groups.

“Regulation Best Interest purports a minimum standard that brokers may not put their own interest before the investor's, but I’m not sure that it does,” SEC Commissioner Kara Stein said, kicking off the meeting in Atlanta.

The SEC’s proposed Regulation Best Interest package establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for advisors, and creates a new Customer Relationship Summary (CRS) form that will clearly state to clients if they are dealing with a broker-dealer or an advisor.

In attendance were members of the SEC’s Investor Advisory Council (IAC), with most of the discussions led by Barbara Roper, director of investor protection at the Consumer Federation of America. The IAC advises the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.

Industry and consumer groups were invited to present their general views about the proposed best interest rule, as well as specifics on disclosure requirements and the Form CRS.

The ambiguity of “best interest” was a common weakness pinpointed by representatives from the Investment Adviser Association, CFP Board of Standards, CFA Institute, Consumer Federation of America, Financial Services Institute and AARP.

At Finra’s annual conference in Washington, D.C. in May, SEC Chairman Jay Clayton said that despite the proposal being called Regulation Best Interest, “it is definitely a fiduciary principle; just like the fiduciary duty in the investment advisor space is a fiduciary principle.”

Other weaknesses identified by the industry and consumer groups were the absence of a requirement for ongoing obligation for broker-dealers; the simplistic solution to distinguishing the type of financial professional by banning the use of advisor/adviser for broker-dealers who are not dually registered as advisors; and the potential for the Form CRS to lead to more confusion – or worse, a false sense of security – among investors

Maureen Thompson, vice president for public policy at the CFP Board, said the language of the SEC’s proposed best interest package falls short even compared with the updated Ethical Standards for CFPs, which hold all financial professionals – whether they be broker-dealers, advisors or transaction order takers – with the CFP certification to a fiduciary standard.

Spelling it out gives the public clarity, according to Thompson. “The public will no longer need to decide what services a CFP is providing and what level of care they’ll receive. We think that is necessary,” she said.

Micah Hauptman, financial services counsel at Consumer Federation of America, said one of the key problems with the proposed best interest rule is it uses the same language used by Finra to define suitability. He said the rule is also – at times – contradictory, citing as an example one line that requires broker-dealers to put aside financial incentives, only to be watered down in another line that asks them to avoid it.

The proposed best interest rule “may do little more” than to rebrand Finra’s suitability rules and “fail to meaningfully change broker-dealer practices,” Hauptman said.

Hauptman said there are also “significant gaps” in terms of investor protection because the proposed rule “doesn’t apply to recommendations to small retirement plans, where some of the worst abuses to Mr. and Mrs. 401(k) occur.”

At the Finra conference in May, Clayton specifically said he takes into consideration the “Mr. and Mrs. 401(k)-type investor” in rulemaking at the SEC.

Hauptman urged the SEC to “adopt a true fiduciary standard” for both broker-dealers and advisors, “ensure that conflicts of interest are not allowed to taint” recommendations and rethink its approach to the broker-dealers’ ongoing duty instead of holding broker-dealers responsible only at the time a recommendation is made.

James Allen, head of capital markets policy for the Americas at CFA Institute, said the proposed best interest rule falls short of requiring broker-dealers to truly act in the best interest of their clients, so as it stands, it would be more appropriate to call this proposed rule “Suitability Plus.”

Being upfront that the proposed rule is indeed just a “Suitability Plus” rule will at least enable investors to “recognize where this regulation is coming from,” Allen said.

Meanwhile, prohibiting broker-dealers from using the advisor/adviser titles could simply lead to the creation or use of other misleading titles, according to Karen Barr, president and CEO of the Investment Adviser Association.

That also doesn’t address how broker-dealer firms tend to sometimes mislead with the way they market their firms and the services they provide, Barr said.

Alone in advocating for the proposed best interest rule during the meeting was Ira Hammerman, Sifma’s executive vice president and general counsel, who described it as a “heightened standard” that is “essentially a fiduciary standard.”

The proposed rule “is a significant step in the right direction” while at the same time “preserving the broker-dealer model,” Hammerman said.

Hammerman shared his own “personal” experiences with broker-dealers and advisors, noting that he had benefitted from paying one-off fees to broker-dealers and did not see the advantage of having an account with an advisor who charges him fees yearly in bull and bear markets.

“No one can legitimately claim that the RIA model is the best model,” he said.


The problem the industry and consumer groups have with the Form CRS, meanwhile, is that it puts the onus on investors to understand their relationship with their financial professionals and everything that falls under that scope, including how the broker-dealers or advisors make money off of the clients’ accounts and the fees they charge.

They add that the current proposed format of the CRS is too complicated and does not inspire engagement from investors.

This standardized disclosure form – to be a maximum of four pages in length – requires an explanation of the principal types of services offered; the legal standards of conduct that apply to the investment advisor or the broker-dealer (whichever relationship applies); the fees a client might pay; and certain conflicts of interest that may exist.

Dale Brown, president and CEO of the Financial Services Institute, said investors are more likely to read simple disclosures with pleasing designs and a lot of white space.

Joe Carberry, senior vice president of corporate communications at Charles Schwab, said a one-page document was likely to be better, so the firm created a one-page protype of the Form CRS for the SEC’s consideration.