Representatives from both investor and advisor groups told lawmakers during a hearing this morning that investors would be better off with no new sales conduct rule at all rather than the Securities and Exchange Commission’s Regulation Best Interest proposal.

The heated hearing of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Subcommittee was the first on the SEC’s proposed sales conduct rules for brokers and quickly pitted the advisor industry and investor advocates against the SEC and GOP lawmakers.

SEC Chairman Jay Clayton was not invited to the hearing for reasons not disclosed. Instead former SEC Chairman Harvey Pitt testified that the proposal was a work in process that would “change everything” with regard to brokers’ conduct.

The rule could be changed over time with “experience,” said Pitt, who found himself in the hotseat explaining why the SEC rule does not prevent conflicts of interest such as sales contests or higher commissions firms pay on proprietary products.

SEC Chairman Clayton and the securities industry have argued that registered investment advisors and broker-dealers need equivalent, but not identical rules. This will allow brokers to continue to work with smaller investors who they allege are served at a more reasonable cost in transaction-based commission accounts.

But when asked if the SEC’s rule is” better than nothing” by Rep. Brad Sherman (D-Calif.), witnesses at the hearing chose nothing.

“No rule rather than this rule,” responded Susan MacMichael John, Chair of the Certified Financial Planner Board of Standards, Inc. “This rule undercuts what existed before and I hope there will be a better rule later.”

Barbara Roper, director of investor protection at the Consumer Federation of America, said the SEC’s rule as written is dangerous because it gives investors a false sense of protection “No rule is better,” Roper said. “This rule deprives investors of the protections they get under common law fiduciary standards now.”

Lee Baker, an advisor and President of Georgia state AARP said: “It’s incumbent on all of us to do better.”

“The proposal is best interest in name only,” added Baker. “At the AARP we hear countless bad stories from investors who were ripped off. The rule should ensure that all advisors are exposed to a fiduciary standard.”

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.