The Securities and Exchange Commission voted on Wednesday to adopt Regulation Best Interest, its high-profile and controversial “package of rulemakings and interpretations.”
The rules, colloquially known as Reg BI, are generally considered to be the commission’s answer to the Department of Labor’s efforts to institute a fiduciary standard.
It’s designed to “enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations,” the commission claims.
Consumer advocates, however, complained that they’re a watered-down, largely industry-friendly set of regulations that will do little to protect investors from abusive broker and advisor practices.
“And it’s official, the Commission just threw investors under the bus (on a series of 3-1) votes,” Barbara Roper, Director of Investor Protection with the Consumer Federation of America, tweeted upon completion of the vote. “Thank you, Commissioner Jackson, as the lone voice in support of investors.”
“Chairman Clayton is using the SEC’s historically weak enforcement of the Advisers Act standard to justify its weak interpretation of that standard,” she added. “But Congress gave the agency explicit authority to fix that standard and he chose not to use it.”
“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” SEC Chairman Jay Clayton said in a statement. “[…] This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”
Under Regulation Best Interest, broker-dealers will supposedly be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.
“Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”
Initial industry reaction
As expected, reaction from the financial services industry was generally positive.
“Today, the SEC took an important step to improve investor protection by finalizing Regulation Best Interest,” Financial Services Institute (FSI) President and CEO Dale Brown said. “This is something we have advocated for before Dodd-Frank became law. The SEC is the correct agency to develop and implement this standard and, while we have yet to fully review the final rule, what we heard during the hearing gives us hope that it will protect investors while also preserving investor choice and access to professional advice.”
“As the Department of Labor considers reviving its work on writing a fiduciary rule, we hope that it will follow the SEC’s lead and apply the rule to all securities transactions or strategies recommended to retail consumers,” Edmund Murphy, President and CEO of Empower Retirement, added in reference to the DOL’s own efforts in the fiduciary space.
The CFP Board took a neutral stance, reminding the public of its mission and the code and standards to which its members must adhere.
“Professional standards-setting organizations, such as CFP Board, exist in part to set standards that go beyond those required by the law for the benefit of the public and the profession,” it wrote. “Those who comply with CFP Board’s Code and Standards will not be in violation of Regulation BI, or any other existing laws and regulations, by doing so. The new Code and Standards complement, rather than conflict, with the law.”
However, Jay Shah, CEO of digital financial advice provider Personal Capital joined Roper in condemning the SEC vote.
“The only way for the financial services industry to earn trust back from Americans is to fully embrace transparency and honesty. Financial advisors should always put the customers’ interests first, with unbiased advice and clear fees. Consumers are demanding it and regulators should require it. Some see the Best Interest standard as a step in the right direction, but it simply creates more air cover for bad behavior.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
