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A Tool for Deception: SEC Commissioner Warns of Best Interest Standard Misuse

By Rita Raagas De Ramos August 9, 2018

SEC Commissioner Hester Peirce worries a best interest standard for brokers could be used as a marketing tool to attract and potentially deceive investors. She says the same problem exists with the fiduciary standard.

“A bigger concern for me is that the best interest standard suffers from the same problem the fiduciary standard does – a term that is wonderful for marketing purposes, but potentially misleading for investors,” she said at a National Association of Plan Advisors forum in Washington, D.C. last month.

“Just as ‘fiduciary’ has been used to lull investors into not asking questions about their financial professional, so ‘best interest’ runs the risk of becoming a term that encourages investors simply to rely on the fact that their best interest is being taken care of,” she added.

Peirce is one of three SEC commissioners who voted in April to move the proposed Regulation Best Interest package forward, but with certain reservations. At that time, she said a better way to describe the proposed standard might be “suitability plus.” Brokers are already held to the suitability standard, which requires investment advice merely be suitable for the client.

If the term “best interest” is maintained, it must be the responsibility of regulators, brokers and advisors “to make an effort to encourage investors to look beyond nice terms to the substance of what their financial professional is doing – or not doing – for them and how much she is charging.”

Peirce said the term best interest “has been bandied about Washington over the last decade as if it were an incantation that could cure all that is wrong in the retail investor space.”

Despite “how nice it sounds,” however, questions remain about what best interest actually means, she said.

If Peirce had her way, she said she “would not refer to the standard as, or include within the standard, the term best interest.”

Aside from the ambiguity of the undefined term in the proposed rule package, she said “we are sending investors a message that they need not ask questions – precisely the opposite of the message investors need to hear.”

Peirce said she would have preferred that the proposed rule package contained a suitability standard while adding the requirement that a broker-dealer firm cannot put its interest ahead of the retail customer.

“Despite what critics have said, the suitability standard applicable to broker-dealers has teeth and has been effective,” Peirce said.

Previously, David Certner, legislative counsel and director of legislative policy for government affairs for the AARP, zeroed in on the Customer Relationship Summary form that is part of the proposed package as a potential source of confusion for investors, or worse, a potential source of a “false sense of security.” AARP advocates for the rights and protection of the aging population in the U.S.

Hester Peirce

The CRS form is supposed to clearly state to clients if they are dealing with a broker-dealer or an advisor. It 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.

As it stands, the CRS form is “too long, technical, and therefore too onerous for the average investor and household to process,” Certner said at an SEC Investor Advisory Council meeting in June.