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SEC Won't Bother Making Meaningful Change to Best Interest Proposal, Decries Investor Advocate

By Rita Raagas De Ramos September 13, 2018

The final version of the SEC’s Regulation Best Interest is most likely going to be very similar to the proposed version – with ambiguity around the definition of best interest and requiring as little as possible from brokers when it comes to disclosures, says Barbara Roper, Pueblo, Colo.-based director of investor protection at the Consumer Federation of America.

“I’m not at all confident” the SEC will make any meaningful changes to the proposed Regulation Best Interest “to better protect investors,” Roper says.

The SEC “had every opportunity” to take the investor protection advice given to it by various groups and to factor in the protections built into the Department of Labor's fiduciary rule even before they started drafting the regulation -- and yet it didn’t do any of that, insists Roper.

The SEC – which says it took its staff 11 months to complete the nearly 1,000-page proposed regulation package – is currently reviewing the thousands of comment letters it received. The proposed package 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 aimed at clearly stating to clients if they are dealing with a broker-dealer or an investment advisor.

“They had lots of advice and evidence going into this rulemaking to suggest that the approach they took was not going to work when it comes to truly protecting investors, and they didn’t listen to that advice or evidence,” Roper says. “It’s hard to believe that they are going to have a sudden conversion and fix the problems now.”

Thomas Holly, Washington, D.C.-based head of the U.S. asset and wealth management practice of PwC also doesn’t expect any “significant deviation” from the proposals. Unlike the DOL rule, the SEC’s proposed Regulation Best Interest is aligned with the “business realities” that broker-dealers face daily, Thomas told FA-IQ previously.

CFA’s Roper says “we’re back to where we were” pre-DOL rule.

“Brokers and insurance companies will still be free to make recommendations that put their interests ahead of their customers’ interest as long as they follow disclosure requirements. And because of the weak enforcement of the Adviser’s Act fiduciary duties, investment advisors will just have to disclose their conflicts in their ADV forms,” Roper says.

Roper says investor protection advocates, such as the CFA, were hoping to be able to support the SEC proposal -- at least until it was unveiled in April.

We're back to where we were pre-DOL Rule.
Barbara Roper
Consumer Federation of America

“We were prepared to support something that wasn’t our dream regulation, that wasn’t everything that we’d like to see in a rule – if it advanced the ball, if it actually raised the standard. We would have been OK even with incremental changes,” Roper says.

But the SEC rule “doesn’t advance the standards for brokers in a meaningful way,” Roper says. “What we see is a standard that makes explicit what already exists under Finra rules. And worse, the disclosures will in fact mislead investors into expecting protections that the standards do not provide.”

Roper says the portion of the proposed Regulation Best Interest that mentions the requirement that broker-dealers should reasonably design processes to mitigate conflicts “doesn’t even explicitly say that those reasonably designed processes should be designed to prevent the conflict from inappropriately influencing the recommendation.” As it stands, broker-dealers could – and probably would – just interpret “reasonably designed” to suit their interests, she says.

Aron Szapiro, Washington, D.C.-based director of policy research at Morningstar, previously told FA-IQ the research firm wants the SEC to require brokers to disclose how conflicts are being mitigated instead of just asking them to disclose those conflicts and try to mitigate them. That would help the SEC evaluate how different kinds of conflicts are being mitigated and if the mitigation strategies are really helpful, he says.

Investor protection advocates may be forced to turn elsewhere to help investors get the protection they need, according to the CFA’s Roper.

“If this is the best the SEC can do, we would certainly be looking at the states to see what more can be accomplished,” Roper says, citing one avenue available to them.

Barbara Roper

But even this option “exposes” the flaws of “what the SEC has done,” Roper says. “One of the ways the SEC has sold this proposed rule is by saying [they] can do a rule that covers all accounts, not just retirement accounts. But then they haven’t even done a proposal that’s uniform for all securities accounts because there’s one standard for brokers and another standard for advisors.”

“There’s not going to be any uniformity, even within the realm where the SEC has exclusive jurisdiction. And it’s clear from the response of the state securities regulators that they don’t seem to think that their concerns were adequately addressed by the SEC,” she says.

In an August 7 comment letter to the SEC, William Galvin, Secretary of the Commonwealth of Massachusetts, says: “If the Commission does not adopt a strong and uniform fiduciary standard, Massachusetts will be forced to adopt its own fiduciary standard to protect our citizens from conflicted advice by broker-dealers.”