Anger over the Securities and Exchange Commission’s proposed Regulation Best Interest bubbled over during a recent one-day event for registered investment advisors, with some professionals even calling for SEC Chairman Jay Clayton to step down because of  what they say is his willingness to prop up broker-dealer industry at investors’ expense. 

The vitriol bubbled over during a seminar sponsored by the Institute for the Fiduciary Standard in Philadelphia last week, where a cadre of veteran industry professionals and attorneys said that a lawsuit to stop the SEC’s proposal is virtually guaranteed if it is passed allowing brokers to broadly offer advice without registering as fiduciary advisors.

Speaker after speaker at the event found fault with the SEC’s controversial Reg BI proposal, which was meant to ease investor confusion and harmonize regulations between brokers and advisors. Critics at the seminar maintained the proposal appears instead to overstep the SEC’s legal authority, which does not extend to granting brokers’ “advisory” status with a preferential carveout; from required fiduciary regulation. The Financial Planning Association successfully sued the SEC over its last attempt to provide brokers with a carveout from fiduciary requirements in 2007.

“The speakers’ message was one of alarm,” said Knut Rostad, co-founder and president of the Institute for the Fiduciary. “The SEC’s disdain for investor protection and loyalty to broker protection-- even openly worrying in the proposal that eliminating conflicts harms brokers--hits a raw nerve. RIA leaders will oppose it any way possible.”

The belief among some RIAs is the SEC and SEC Chairman Clayton are using the proposal to help shore up the broker-dealer declining commission-based business at the expense of investor protection and already-effective advisor regulation.

Ron Rhoades, a professor at Western Kentucky University and former advisor who has been instrumental in the creation of industry ethics, called the SEC’s Reg BI “a vast conspiracy theory.” The proposal was orchestrated by the broker-dealer industry and their self-regulator FINRA, said Rhoades. “The three of them pushed it on the SEC and because we have a very weak SEC Chairman in Jay Clayton, who adopted the BD industry’s platform.”

“Broker dealers know their market-share has been continuously declining and the SEC wants to prop up broker-dealers by letting them pretend that they act in the best interests of their clients. And there is nothing in this [proposed] regulation that requires that,” said Rhoades. “So basically it’s the SEC aiding and abetting a massive fraud called Reg BI.”

When asked how Clayton could fix the proposal, Rhoades said it wasn’t fixable and that Clayton should step down. Others echoed that sentiment.

“When the SEC says we’re preserving investor choices, what they really mean is they’re propping up captive brokers and wirehouse firms,” said Brian Hamburger, founding and managing member of the Hamburger Law Firm. “When the SEC says harmonization, what they really mean is equalization and creating false consumer safeguards and destroying distinctions within our financial ecosystem that really makes it great and something the world admires,” said Hamburger, also the co-founder of MarketCounsel, a regulatory compliance consulting firm for entrepreneurial investment advisors.

Hamburger said he met with SEC officials recently and walked away wondering why regulators would want to undermine historically sound investor protections that exist in advisor regulation? “It doesn’t make sense. What the SEC has in fact done, when you look at these proposals in conjunction with one another, is effectively kill the fiduciary standard,” Hamburger said. “They do that in a really smart way, because what they do is extrapolate the two most important words from the fiduciary standard--and we all know that those words are best interests--and graft them onto a suitability standard. So, it’s not enough that we codify the suitability standard, but we’re eroding what’s so precious about the fiduciary standard.

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