Published
September 23, 2019
Everyone likes a fair deal, whether it’s at the supermarket or a car dealership. It’s the same in the world of investing. Customers want the best, timely advice from their broker and to know that their broker will act in their best interests with their hard-earned money.
That’s why it’s important to have fair, transparent rules applicable to both parties: investors and brokers. But increasingly, activist groups and politicians are headed the wrong way on this important investor protection – and putting customers and the greater financial system at risk. At issue is the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) which firms must be in compliance by June 2020.
The goal of this new rule is simple, protect the small retail investor:
…the retail investor will be entitled to a recommendation…or advice…that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.
Reg BI was the culmination of a comprehensive, years-long effort by regulatory experts at the SEC to enhance the standards of conduct for financial professionals that advise retail investors.
Some the benefits of Reg BI include:
- An explicit requirement to act in customers’ best interest: Unlike the longstanding “suitability” rule for brokers, Reg BI includes a stated requirement that brokers act in the best interest of their clients.
- One national standard: Reg BI creates a uniform set of standards for the investment advice industry. That means one nationwide legal standard from Alaska to Florida, not a confusing (and possibly conflicting) patchwork of state regulations. Investors and firms now have clear rules of the road, an absolute necessity for investor protection.
- Better disclosures for investors: The new “form CRS” summary is investor-friendly and will allow individuals to make informed decisions when working with a financial professional.
Standards of conduct for brokers and investment advisers has been a hot topic in Washington over the last decade. When the Department of Labor (DOL) issued its “fiduciary rule” in 2016, it was widely panned as regulatory overkill brought on by an agency with little expertise in securities markets. When the DOL rule was ultimately tossed out by the courts in 2018, it was up to the SEC – the agency with eight-plus decades of relevant experience – to establish new standards of conduct for brokers and investment advisers.
But along the way, a cottage industry of politicians and special interests sprung up in opposition to Reg BI, no matter what the text of the regulation actually says or the benefits it will ultimately deliver.
The latest salvo in the fight against Reg BI is a lawsuit by seven states (plus the District of Columbia) to have the rule vacated, presumably so that a future administration has the opportunity for a do-over. Apparently, these attorneys general have no qualms about diminishing investor protections. (Also, from a substance standpoint, the lawsuit carries a fundamental misunderstanding of the SEC’s authority under the Dodd-Frank Wall Street Reform and Consumer Act and mischaracterizes some key Reg BI provisions.)
And states are looking to go their own way when it comes to standards of conduct, adding to confusion and compliance headaches for businesses. Nevada, New Jersey, and Massachusetts have all proposed some variation of a DOL-like rule that, in many cases, would conflict with Reg BI. Should these states be successful, it would create a patchwork of different regulations across the country which would only confuse investors and make it more costly for them to save.
Meanwhile, Beltway special interest groups continue to beat the drum of opposition to Reg BI through misleading and often factually incorrect arguments. In response, SEC Chairman Jay Clayton pushed back forcefully against attacks on Reg BI in July:
Much of [Reg BI] criticism…is false, misleading, misguided, and unfortunately, in some cases, is simply policy preferences disguised as legal critiques.
To add some much-needed clarity to the debate, we recently released some Myths Vs. Facts to dispel some of the more common criticisms of Reg BI.
Many Reg BI opponents prefer certain business models over others and want the SEC to pick winners and losers through its rulemaking. Chairman Clayton and the SEC commissioners that voted in favor of Reg BI were right to reject this approach and instead have issued a rule that will better inform investors and curtail bad practices within the industry.
The benefits of Reg BI to the capital markets are abundantly clear, and there is little doubt that investors are better off today than they were before the rule was finalized and went into force. Opponents of the rule should recognize this fact and support Reg BI – there’s still time to get on the right side of history.
About the authors
Tom Quaadman
Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.
