The SEC’s new Regulation Best Interest will give financial institutions a legal advantage when they're sued by investors, a panel of law professors said yesterday.

Companies will have an easier time defending themselves in such court cases because Reg BI allows them to get away with "informed consent" disclosures that are so obtuse they may never be read or understood by customers, according to the professors.

The regulatory agency’s test for informed consent takes the onus off the industry and creates a “buyer-beware” trap that will make it difficult for investors to prevail in legal proceedings, three law professors from Duke, Georgetown and Tulane universities told reporters during an online Institute for the Fiduciary Standard panel discussion.

“If you take the recommendation, that becomes consent,” said Donald C. Langvort, Thomas Aquinas Reynolds Professor of Law at Georgetown University. “The commission uses words that will live a long time on the defense side. When there has been full and fair disclosure, informed consent is present where the customer affirms by accepting the recommended action.”

Langvort called the industry’s ability to obtain informed consent by simply delivering complicated disclosures “the soft spot in the regulation."

The message to the world from the broker-dealer and annuities industry is, “We’ve won. We’re not fiduciaries,” Langvort asserted.

“Unless organizations and regulators enforce Reg BI and enforce it vigorously, then the message to operate in good faith is never going to get through. I find it abhorrent that the SEC can create a mandate ... and then say to customers, ‘If this happens, there is nothing you, the customer, can do about it.' I think on its face, that’s a mistake,” he added.

While the SEC has said that enforcement of Reg BI will not be by “wounded customers,” but through proactive examination findings and algorithm red flags, James Cox, the Brainerd Currie Professor of Law, Duke Law School, said the SEC and firms have to put real teeth into their compliance programs and move beyond a disclosure boilerplate to protect investors.

“I see enforcement as the failure of compliance,” Cox said. Firms need to ramp up compliance programs “that are driven by a healthy regard for looking over one’s shoulder to consider what government regulators will say. The SEC has to make sure that inspections and examinations “have some bite to them. What should they be biting on? First thing we can look at is disclosure,” Cox said.

With SEC Chairman Jay Clayton announcing he will be stepping down after being nominated by President Trump to be U.S. attorney for the Southern District of New York, new regulators should look at underlying investor concerns, the professors said.

Ultimately, the success of Reg BI in driving costly conflicts from the industry will depend on how firms and the SEC apply and enforce the regulation, said Ann M. Lipton, a law professor at Tulane University.

Without strict and active compliance, complexities including complex products and compensation are difficult to disclose, she said.

Firms should be willing to do more consumer testing and analysis and ask themselves what retail investors can be expected to reasonably understand. “You can’t just do an endless disclosure about possible conflicts and put your actual conflict on page four” and expect Reg BI to work, Lipton said.

The same stringent compliance and enforcement has to apply to the new U.S. Department of Labor’s fiduciary proposal, which the panel worried is less effective than Reg BI in protecting investors because of all of its exemptions.

“One of the things that is really worrying me is the DOL standard,” Lipton said. “It is the most important because 401(k)s may be many people’s only investments, so disclosure should be more robust here and it’s the least robust.”