There’s no dearth of corrective criticism surrounding the Securities and Exchange Commission’s Regulation Best Interest proposal. The latest missive comes from the agency’s own Investor Advisory Committee which today approved by a vote of 18-3 the release of an 8-page letter calling on the SEC to create explicit fiduciary principles for brokers.
Reg BI is ostensibly designed to require brokers to mitigate their conflicts of interests, which cost investors some $18 billion annually in added fees, commissions and inferior investment performance, according to an earlier White House report.
The proposal is also supposed to elevate the sales standards brokers are held to and help consumers more easily understand what they are and aren’t getting if they hire a broker instead of a registered investment advisor, since only the latter is currently subject to a fiduciary standard.
“Our recommendation is to build on the strength of the proposal and not send the commission down a different path,” said Barbara Roper, an IAC member who wrote the recommendations. Roper is also director of investor protection at the Consumer Federation of America.
“Making it clear that both broker-dealers and investment advisers, regardless of business model, are working as fiduciaries under a standard tailored to the functions they perform would simplify the issues for investors and the regulated community alike,” the IAC said in its recommendations.
“It would eliminate the debate over whether some financial professionals are subject to a higher standard than others and thereby reduce incentives to select business models and registration status (broker-dealer vs. investment adviser) based on regulatory considerations,” the group said. “It also has the potential to greatly reduce the complexity of Form CRS [Customer Relationship Summary], since it would no longer be necessary to educate investors on the difficult to grasp differences between fiduciaries and non-fiduciaries. Rather, an investor could select his or her financial professional based on the business model that best matches the investor’s needs,” the IAC said.
The IAC is asking the SEC for the following changes to the best interest proposal:
- Clarify the obligation of both brokers and investment advisors to act in customers’ best interests.
- Expand the best interest obligation to cover rollover recommendations and recommendations by dual registrant firms regarding account types.
- Characterize the best interest rule explicitly as, a fiduciary duty, while making clear that the specific obligations that flow from that duty will vary based on differences in business models.
- Conduct usability testing of the proposed Form CRS [customer relationship summary] disclosures and, if necessary, revise them to ensure that they enable investors to make an informed choice among different types of providers and accounts.
SEC Chairman Clayton, who attended the IAC meeting, said the SEC expects to release a more detailed study specifically on form CRS [customer relationship summary] in the next several days.
“I know the staff has looked at these issues before and I look forward to reviewing them with staff,” said Clayton, who added that the agency has received some 6,000 comment letters of the Reg Best Interest proposal, 3,000 of them unique.
According to Roper: “We share the goal, expressed by Chairman Clayton and others, that the standard for broker-dealers and investment advisers alike be based on fiduciary principles designed to ensure that financial professionals act in their customers’ best interests and do not place their own interests ahead of their customers’ interests.”
A majority of the IAC also wants the SEC to clarify what it means when it states that brokers and advisers are required to act in their customers’ best interests, the report stated.