It may have been years in the making, but the Securities and Exchange Commission’s new retail investment advice rule still rankles some veteran registered investment advisors. They’re particularly bothered that the “best interest” moniker may mislead investors into believing they’re receiving fiduciary advice from their brokers, when they don’t.
One of the most vocal critics of the rule is using the eve of the confirmation hearing for President Biden’s choice for SEC chairman, Gary Gensler, to tell the likely next top securities cop that the least he can do to make the rule better is to change its name.
“Change the damn name” to “new suitability,” Harold Evensky, founder of Evensky & Katz, said in a press release from the Institute for the Fiduciary Standard, a trade group that has championed a long-running campaign for tougher fiduciary broker-dealer rules.
“Reg BI is no best interest standard. Fiduciary is,” he said. Reg BI’s name is “grossly misleading.”
While it is unlikely Reg BI itself will be overturned, Gensler is likely to more aggressively enforce the sweeping new rule. “If confirmed as SEC chair, I will work with my fellow commissioners, the SEC’s exceptional staff, and the members of Congress to ensure our markets remain the world’s best,” Gensler said in his opening statement for tomorrow’s hearing, which he released today. “That means strengthening transparency and accountability in our markets, so people can invest with confidence, and be protected from fraud and manipulation.”
Gensler is no novice when it comes to the pressures of market meltdowns, Wall Street and Washington D.C. When he was named chair of the Commodity Futures Trading Commission (CFTC) by then-President Obama in 2009, progressives in the Democratic party were wary of Gensler, who early in his career became one of the youngest partners at Goldman Sachs. But they were pleasantly surprised after he emerged as an aggressive regulator.
Gensler alluded to this experience in a prepared statement. “Twelve years ago, when I became chair of the Commodity Futures Trading Commission, our economy was reeling from the financial crisis. My fellow commissioners and I took decisive action to increase transparency and reduce risk in the $400 trillion swaps market. I’m proud that 85% of our actions passed the commission with bipartisan support," he said.
“But when we take our eyes off the ball—when we fail to root out wrongdoing, or to adapt to new technologies, or to really understand novel financial instruments—things can go very wrong. And when that happens, people get hurt,” Gensler said.
Evensky’s recommendation is one of several laid out in an Institute for Fiduciary Standard paper which identifies the fixes the SEC should make to Reg BI to raise investor understanding. Institute suggestions include the following:
• Rebrand Reg BI as a ‘New Suitability’ standard for broker-dealers; affirm broker-dealer product recommendations are distinct from best-interest fiduciary advice;
• Strengthen the broker-dealer ‘New Suitability’ standard by eliminating certain conflicts;
• Provide new guidance and clarity for the broker-dealer standard of conduct;
• Mandate disclosure in Form CRS to express the stark differences between fiduciary advice and product sales and test such language with consumers; exempt registrants if disclosure is also contained in other disclosure statements.
• For the Advisers Act, conflicts of interest that inherently violate the client’s best interest must be avoided; disclosure alone is insufficient.
• Further, strengthen the application of the Advisers Act’s fiduciary standard through guidance on state product recommendations are distinct from best-interest fiduciary advice.
“It is simple. Don’t say you do something you don’t do,” said Roger C. Gibson, founding partner at Gibson Capital LLC. “If you don’t put clients’ best interest first, don’t say you meet a best interest fiduciary standard.”