John told lawmakers that investors would be better served if the SEC took an approach that mirrored the CFP Boards new conduct standards. The standards “unambiguously define ‘best interest’ as ‘fiduciary” and include both a duty of care and loyalty to investors,” John said.
Reg BI fails short because it does not define “best interest” and does not have a stand-alone duty of loyalty and care. Nor does Reg BI prescribe an effect way of handling conflicts of interest, Johns said.
“While we appreciate the opportunity the rule proposals represent, our concern is that they offer the appearance, but not the reality, of increased investor protection,” John told lawmakers. “However, if the proposed rules are strengthened, we believe the Commission may realize its goal of increasing investor protection.”
Rep. Andy Barr (R-Ky.) called the notion that no SEC rule is better than the currently proposed reg “ludicrous. The ideas that it is the same as the status quo is patently untrue,” Barr argued
The SEC’s limited testing of Reg BI’s customer disclosures (Form CRS) was also the subject of debate. To remedy what he said were SEC shortcomings in investor testing, freshman Rep Sean Casten (D-Ill.) is has written a discussion draft of a bill ‘‘SEC Disclosure Effectiveness Testing Act (https://financialservices.house.gov/uploadedfiles/bills-116pih-secdisclosure.pdf).”
The discussion draft requires the agency to conduct nationwide usability testing, including surveys and interviews, when developing rules and regulations about disclosures to retail investors. Such reviews and tests would be required prior to the SEC adopting a final rulemaking.
“Does anyone here believe that only 31 qualitative interviews is enough?” asked Casten, referring to number of one-on-one customer interviews the SEC did before proposing Form CRS. The disclosure is supposed to explain products, services and conflicts of interest to customers when they engage a broker, advisor or dually-registered advisor.
SEC testing with customers shows the Form CRS “disclosures aren’t well understood. If they were required to do real quality testing…they could work with disclosure design and drafting experts to get disclosure right,” answered Barbara Roper, Director of Investor Protection at the Consumer Federation of America.