The Securities and Exchange Commission has released new rules proposals regarding advice for retail investors. They proposed a new document they dubbed a customer relationship summary (CRS) that is supposed to help the public distinguish between broker/dealers and investment advisors. It has been over two months since the release and I am still flabbergasted at how badly the SEC missed the mark.
To provide more consumer protections, the SEC proposes “Regulation Best Interest” as an enhancement to the suitability standard. Sadly, Reg BI, as some are calling it, would be better described as Reg BS.
The release acknowledges that there is a difference between suitability and fiduciary with suitability being a lower standard than the fiduciary duties that apply to advisors. This difference is offered as a reason for this new regulation.
The release states, “Our goal in designing proposed Regulation Best Interest is to enhance investor protection, while preserving, to the extent possible, access and choice for investors who prefer the “pay as you go” model for advice from broker-dealers, as well as preserve retail customer choice of the level and types of advice provided and the products available.”
That sounds nice but the proposal veers off course quickly. It is fundamentally flawed and actually makes the consumer’s choice more difficult.
Rebranding Suitability
First, Reg BI is simply not a substantive change from suitability. Here is FINRA’s explanation of suitability from the FINRA website:
Suitability Obligations
Rule 2111 lists the three main suitability obligations for firms and associated persons.
• Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.