Consumer Federation of America (CFA) executives pressed their case for the inclusion of a mandate for “clean brokerage shares” in the agency’s best interest proposal directly with Securities and Exchange Commission Chairman Jay Clayton earlier this month.
The CFA representatives Director of Investor Protection Barb Roper and Financial Services Counsel Micah Hauptmann told SEC Chairman Clayton in the April 11 meeting that without fairly drastic changes like a mandate for clean shares and level commission, the agency’s broker conduct proposal falls short of providing investors with protections they are being promised.
“Unfortunately, while we believe it would be possible to adopt standards that meet investors’ reasonable expectations under the Commission’s chosen regulatory approach, the regulatory package as currently drafted does not achieve that goal,” Roper and Hauptmann told SEC Chairman Clayton in a follow-up letter.
The SEC standards, called Regulation Best Interest, are on track to be finalized by fall, according to agency officials.
CFA has been one of the most active to advocate for pro-investor changes. Specifics on their request are spelled out in a proposed regulatory framework the CFA duo also delivered to Clayton April 11.
CFA’s framework also advocates precise investment analysis and fee disclosure, investor consent, conflict mitigation and heightened supervision.
“Our purpose in developing this framework was to demonstrate that it is possible…to attack the toxic web of conflicts that pervade the broker-dealer business model without in any way threatening investors’ access to transaction-based advice,” Roper told Financial Advisor.
“If the SEC were to adopt this approach as part of its requirement to mitigate conflicts of interest under Reg BI and to avoid conflicts under the Advisers Act fiduciary standard, its standards might actually live up to their best-interest label,” added Roper, who is also a member of the SEC’s Investor Advisory Committee.
The CFA is requesting that three types of current industry conflicts-- those inherent in firms’ business models, product-specific conficts and those artificially created to increase sales, such as sales contests—be addressed by the SEC within the current Reg BI framework.
“By removing all distribution-related costs from the products, clean shares in particular have the potential to eliminate incentives for broker-dealer reps to recommend funds based on their own financial interests rather than the investor’s best interest. (Though some clean shares appear to be 'cleaner' than others.),” the CFA said.