By Anne Sherry, J.D.
The ranking members of four House and Senate committees are leading a call for the SEC to revise Regulation Best Interest, asserting that the proposed rule does not quite satisfy the agency’s Congressional mandate and that it falls short of protecting investors. In the letter to SEC Chairman Jay Clayton, the lawmakers urge the SEC to amend the proposal before it is finalized, even if it means re-proposing the rulemaking. Thirty-one legislators signed the letter along with Ranking Members Maxine Waters (D-Cal.), Bobby Scott (D-Va.), Sherrod Brown (D-Ohio), and Patty Murray (D-Wash.).
The Dodd-Frank Act authorized the SEC to require all brokers and advisers to comply with the same fiduciary standard, the letter states. But rather than propose Regulation BI under Section 913(g), the SEC used the less specific Section 913(f), which authorized the SEC to conduct rulemaking on the standards of care for advisers considering the results of a mandatory study. The congresspersons identify two issues with this: first, the proposal applies two distinct standards for brokers (“best interest”) and investment advisers (“fiduciary”), neither of which matches Section 913(g)’s strong, enforceable standard. Second, the SEC did not adequately consider the results of its own study.
The proposal does make clear that the best interest standard is not the same as that set forth in Section 913(g), but it fails to adequately explain how it would impose requirements on brokers that differ from the status quo. Any best interest standard should clearly differ from the current suitability standard, the letter continues. Furthermore, the SEC must clearly explain that standard, what conduct it requires and prohibits, and how it differs from the status quo. The SEC should also make clear that brokers’ written policies and procedures should reduce the impact of conflicts.
The legislators are also concerned with the proposal’s heavy reliance on disclosures to investors without any evidence suggesting the disclosures would be effective. “At best these disclosure forms may further confuse investors,” the letter posits; “at worst they could lead to a false sense of security that the advice is in their best interest.” The associated forms should be tested and subjected to public comment before they are incorporated into any final rule.
Finally, the letter welcomes the SEC’s bar on the use of the term “adviser” by professionals that are not registered investment advisers, but says that this restriction fails to address the many other titles that professionals use. These titles—including wealth manager, financial consultant, financial manager, money manager, investment manager, financial planner, and investment consultant—are used interchangeably between advisers, brokers, and dual registrants. The lawmakers urge the SEC to fend off investor confusion by adopting a principles-based approach that prevents brokers from holding themselves out as investment advisers or acting in an advisory capacity.