Securities and Exchange Commission Jay Clayton used the first investor roundtable in Boston last night to go on the defense against what he called “criticism and misleading information” regarding Regulation Best Interest--the agency’s controversial new package of retail conduct standards.
“I believe that much of the criticism…is false, misleading, misguided and unfortunately in some cases, is simply policy preferences disguised as legal critiques,” Clayton told investors, industry executives and journalists who gathered in Boston.
It was an interesting choice of settings for Clayton to legally refute what he said were inaccuracies about the rule, given the investor audience. While touting the SEC’s intention to create more investor education and webinars to help inform investors—who he acknowledged are confused about whether to hire a broker or a registered investment advisor—it is noteworthy that neither the roundtable nor Clayton’s address itself were webcast on SEC.gov or were recorded so that investors nationwide could hear his speech.
He acknowledged that critics of the rule argue that the broker standard does not apply a fiduciary-level registered investment advisor regulation to protect investors, but defended that decision.
“A number of commenters expressly or impliedly advocated for regulation that would collapse the distinction [between brokers and advisors], with a substantial majority of those commentators favoring the generally applicable investment adviser model where clients pay an asset-based fee or a flat fee for generally broad-based financial advice from a fiduciary,” Clayton said.
House Financial Services Chairwoman Maxine Waters (D-CA) introduced a bill last week to prohibit the SEC from using funding to implement Reg BI over the agency’s failure to create a fiduciary standard for brokers. Chances of passage in the GOP-led Senate are nil, but the bill underscores the level of critics’ dismay.
“I do not believe that a “one size fits all” approach would best serve the diverse interests of our Main Street investors. Further, I believe in this area, a one-size fits all approach could reduce the availability and increase the cost of advice and services, particularly for those with relatively smaller accounts,” Clayton added.
Ongoing advisor relationships will work for some investors, but for “many other investors, the broker-dealer model, particularly after the implementation of Reg. BI—either alone or in combination with an investment adviser relationship—provides the better match.”
Clayton said that critics’ argument that Reg BI is a weak standard because it does not require broker-dealers to monitor a customer’s account or impose an ongoing duty of care “is fundamentally flawed….I believe investors should be able to choose whether they want ongoing monitoring services and whether to incur the cost of those services.”
The legal reason the SEC did not create an ongoing responsibility for brokers, however, is because “that activity would subject the broker-dealer to regulation as an investment adviser.
“Therefore, and let me be clear about what such a requirement would mean: imposing an ongoing monitoring obligation would effectively prohibit brokers from providing retail customers with advice without registering as investment advisers. Again, that would mean less access and choice, and higher costs, for retail customers,” Clayton said.