The Securities and Exchange Commission should rename Regulation Best Interest so investors aren’t confused about the difference between investment advisers providing fiduciary advance and a broker selling an investment product, fiduciary advocates said Thursday.
In addition to changing the name of Reg BI, it called for eliminating some broker conflicts of interest, such as compensation incentives for product sales, revising the disclosure Form CRS, and clarifying that investment advisers must avoid conflicts of interest rather than just disclosing them.
The “best interest” term in Reg BI misleads investors because it’s the same phrase that is at the heart of the fiduciary duty that continues to govern investment advisers, fiduciary advocates said. Instead, Reg BI should be called “New Suitability,” which refers to the previous broker standard.
“Broker-dealers are designed and built to represent issuers and other sellers,” Knut Rostad, president of the Institute for the Fiduciary Standard, told reporters on a conference call. “Broker-dealers cannot meet a best interest fiduciary standard.”
But that’s what Reg BI implies, Brian Hamburger, chief executive of MarketCounsel Consulting, said on the call. “We have to level with investors, that’s at the crux of all of this.”
Reg BI was the signature rulemaking of former SEC Chairman Jay Clayton, who said the regulation raised the broker standard well above suitability and strengthened investor protection. The brokerage industry also strongly supports Reg BI, maintaining that it requires substantial changes in the way brokers provide advice and disclose conflicts.
Critics say Reg BI appropriated the “best interest” phrase but not the related standard of care.
“Regulation Best Interest by its very name is likely the greatest securities fraud in the history of the SEC,” Ron Rhoades, associate professor of finance at Western Kentucky University, said on the call. “There needs to be a new rule to, at a minimum, remove the term ‘best interest’ from describing a broker-dealer standard of conduct.”
It’s unclear whether the incoming Democratic-majority SEC will undertake a rulemaking to overturn Reg BI or will try to strengthen it through guidance and enforcement.
Rostad is confident the institute’s Reg BI recommendations will be taken seriously by Gary Gensler, a former chairman of the Commodity Futures Trading Commission and former Wall Street executive, who has been nominated to serve as SEC chairman by President Joe Biden. Gensler previously headed the Maryland Consumer Financial Protection Commission, which promoted legislation that would impose a fiduciary standard for investment advice in the state.
Rostad said much of the Reg BI reform will have to be done through rulemaking.
“We’ve got every reason to believe he’ll be open-minded about the nature of these changes,” Rostad said. “We have reason to believe he’s sympathetic with what we’re talking about.”
Hamburger is doubtful that the SEC will reform Reg BI on its own.
The Dodd-Frank financial reform law included a provision that said the SEC could only change the broker advice standard if it made it “no less stringent” than the advice standard that investment advisers must meet. A lawsuit to strike down Reg BI failed when a federal appeals court ruled the SEC did not violate the Dodd-Frank law in promulgating the regulation.
“Congress has spoken,” Hamburger said. “The most effective way that we can get back on track here is for Congress to speak again — is for Congress to insist that the SEC act in compliance with the law.”
That will cause a heavy regulatory lift for the SEC.
“Practically speaking, this would require the SEC to amend the rules,” Hamburger said. “But I will tell you, interpretative guidance is not going to do it here. The SEC, at a minimum, has to amend these rules to ensure we have a very clear standard and practices across the industry.”
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