Welcome to Financial Advisor IQ

Investors Hate the SEC’s Best Interest Rule Proposal

By Rita Raagas De Ramos May 4, 2018

The public’s initial reaction to the SEC’s proposed Regulation Best Interest package is overwhelmingly negative, based on the feedback submitted so far to the watchdog’s request for comments.

Out of the 21 public comments as of Friday, 17 call out the SEC for not doing enough to ensure broker-dealers will be acting in the best interest of investors – full stop and with no wiggle room.

Earlier this month, the SEC unveiled its proposed Regulation Best Interest package, which establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form that will state if clients are dealing with a broker-dealer or an investment advisor.

The most common criticism among those who submitted comments is the double standard applied to financial professionals in the proposed package. They question why broker-dealers are held only to best interest standards, which aren’t considered stringent because they can always turn to conflict of interest disclosures to protect them. In contrast, investment advisors are held to fiduciary standards.

“This seems to be a particularly egregious example of double-talk designed to mislead investors into thinking they are protected by the SEC when in fact there is no protection at all,” says Maxwell Patrick Jr., who identifies himself as a retired district operations manager.

Patrick’s main complaint is that under the proposed SEC rule it’s enough for broker-dealers to disclose conflicts of interest to prove that “the investor’s best interest is served.”

Christopher Green, who identifies himself as a retired financial advisor, says “there is absolutely no benefit to the long-term viability of our industry in allowing any wiggle room when it comes to providing objective financial advice.”

David Trainer, CEO of investment research firm New Constructs, says the “fundamental flaw” of the SEC proposed best interest rule is the “ambiguous interpretation” of the broker-dealers’ duty of care. This will particularly be a problem when broker-dealers try to fulfill their duty of care when making investment recommendations, he says.

The most common criticism is the double standard applied to financial professionals.

“No matter how much training an advisor gets, he or she will never have the time and/or resources required to perform research with enough rigor to fulfill the duty of care when making investment recommendations,” Trainer says.

Maxwell Coulliette, president of One Financial Advisors, which provides investment and insurance advisory services, says the proposed SEC rule “appears to fall short of its intended result” of “protecting consumers from commission-driven sales.”

Coulliette says the proposed SEC rule does nothing to solve the problem of insurance agents who are motivated by commissions when selling products.

“Insurance agents that are not securities licensed in any way will need something to motivate them to act or comply with conditions of a fiduciary standard,” Coulliette says.

One of the challenges to producing a uniform fiduciary standard is the various regulators involved.

In terms of oversight, there’s the Department of Labor’s Erisa standard for qualified retirement accounts, Finra oversight for broker-dealers, and standards arising from securities laws governing the SEC for investment advisors.

In terms of products, securities and variable annuities are regulated by the SEC, whereas fixed annuities are regulated by state insurance commissioners through the National Association of Insurance Commissioners.

Another common criticism by commenters is the SEC’s expectation that average investors would understand the difference between the best interest standard for broker-dealers and the fiduciary standard for investment advisors.

Charles Olson says most average investors from the Midwest, like himself, would interpret the best interest and fiduciary standard in the SEC’s proposed Regulation Best Interest package to mean the same thing.

Many comment that all financial professionals, and not just investment advisors, should be held to the highest possible standard.

“Anything less invites misrepresentation or fraud,” says commenter Kenneth Phillips.

A commenter who identifies himself as retired Sergeant Major Jackson says not holding financial professionals accountable would risk a repeat of “the era of Enron, Madoff and the demise of mortgage loans,” referring to major events that significantly strained the U.S. financial system and investors' confidence in it.

Matthew Ely, who identifies himself as a retired physician, says the investing public was “never made whole again after the banking shenanigans, fraud and cheating” they suffered in previous years.

“All of us … deserve better oversight of these powerful institutions and their functionaries,” he says.

Some commenters have specific recommendations for the SEC.

Commenter John Walsh has input regarding the Customer Relationship Summary (CRS) form. The proposed SEC Regulation Best Interest package requires broker-dealers provide clients with a CRS that will clearly show whether clients are dealing with an investment advisor or a broker-dealer. The CRS 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.

Wash believes the CRS form should be a one-page document, contain the actual fees to be charged, and extend the clarification of the financial professional to say whether he/she caters to investors with “modest” or “significant” wealth.

Some say the SEC should do away with the CRS form requirement because the information it requires is already contained in the Form ADV that advisors give their clients.


The SEC currently only requires investment advisors to submit the Form ADV. Part one of the form requires information about the investment advisor’s business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the advisor or its employees. Part two requires investment advisors to prepare brochures “written in plain English” that contain information such as the types of advisory services offered, the advisor’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel.

Requiring a new CRS form “will only confuse the prospective client and be unduly burdensome on the advisor,” says Renee Hall, president of Registered Advisor Services, which helps advisors with regulatory registration support.