Investment recommendations should be based on investments, investment strategies, accounts, or services they reasonably believe represent the best available options for the investor, the report said.
“For example, firms would not be precluded from offering a limited menu of proprietary investment products.”
Critics pointed out, however, that brokers who offer a limited spate of their firm’s proprietary products can often cost investors significantly more in commissions, fees and inferior performance.
Indeed the IAC’s recommendations would not interfere with such practices: “Nor would our proposed approach limit brokers’ ability to earn commissions or other transaction-based payments or require them to consider investments that do not involve such payments,” the group said.
“Finally, our suggested approach would not require recommending the lowest cost option. On the contrary, as is proposed in Reg BI, our suggested approach would require brokers to take into account the full range of material characteristics of an investment, strategy, account or service in developing their recommendations,” the IAC recommendations stated.
The IAC does, however, want the SEC to expand the best interest regulation to include rollover recommendations and account type transactions that are made at the beginning of an investor’s engagement with a sales professional. “Some of the most important decisions investors make arise at the outset of the relationship, before they receive recommendations regarding specific transactions,” the IAC stated.
Both types of recommendations “inherently involve potential conflicts of interest, making it critical that advisers and brokers put their clients’ interests ahead of their own in making such recommendations.”
The IAC is also asking the SEC to professionally test Form CRS disclosures on investors to gauge its effectiveness.
“A majority of the IAC believe the disclosures should be subjected to usability testing in order to determine their effectiveness. Should the usability testing find that the disclosures do not achieve their intended purpose of reducing investor confusion and promoting informed decision-making, we encourage the Commission to work with a disclosure design expert to rectify this significant shortcoming before finalizing the document,” the committee said.
It is unclear whether the SEC’s soon-to-be-released Rand study actually tested Reg BI on investors or not—something consumer and advisor groups have also called for. SEC staff has dodged the question for months.