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Regulation and Compliance > Federal Regulation > SEC

SEC's Clayton Says Sales Contests Must Die

By Melanie Waddell

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SEC Chairman Jay Clayton. (Photo: New York Law Journal)

Securities and Exchange Commission Chairman Jay Clayton said Wednesday that “questionable practices” such as product-based sales contests should be eliminated.

In a statement regarding the feedback the SEC has received during investor roundtables on a package of rules intended to ensure brokers and advisors act in clients’ best interest, Clayton listed the themes that he said “resonated” with him.

(Related: Consumer Groups Lobby SEC to Drop Support of Mandatory Arbitration)

The agency also announced the same day that it would hold another investor roundtable in Baltimore on Sept. 20 to garner feedback on the advice standards package. SEC Commissioners Kara Stein and Robert Jackson are expected to join Clayton and senior SEC staffers at the event.

Regarding sales contests, Clayton stated Wednesday that “Main Street investors have no tolerance for certain questionable sales practices such as high-pressure, product-based sales contests. In these circumstances, I do not believe it is possible for an investment professional to say with credibility that the investment professional is not putting his or her own interests ahead of the interests of the customer.”

Eliminating these sales contest practices “would enhance investor protection but would not adversely affect investor choice and opportunity.”

The agency has already held six roundtables in Houston; Atlanta; Miami; Washington, D.C.; Philadelphia; and Denver.

“These investor roundtables have been incredibly valuable, and I have enjoyed engaging directly with our Main Street investors,” Clayton said.

Based on feedback agency officials have received from the roundtables, Clayton said that “the way forward” on the SEC’s anticipated rulemaking should include regulating advisors and brokers so that they “will exercise appropriate care in making recommendations and will not put their interests ahead of the interests of their customers.”

Main Street investors, “particularly those who appreciate the distinctions between the broker-dealer relationship model and the investment advisor relationship model, want to maintain choice, Clayton said.

“They want to be able to select a brokerage account, an investment advisory relationship, or in some cases both.”

It’s also clear, he continued, “that the key differences between broker-dealers and investment advisors are not well understood by many of our Main Street investors.”

The agency’s proposed rules “are intended to address this confusion head-on by mandating a customer relationship summary that would highlight the services offered, the legal standards of conduct that apply, the fees a customer might pay and conflicts of interest that may exist,” Clayton added.

Betterment Suggests Changes to Form CRS

CEO Jon Stein of the robo-advisor Betterment urged Clayton in his Aug. 7 comment letter on the advice proposal to make changes to Form CRS, which will provide a summary of the client relationship.

“The commission has, for the most part, identified the key issues that Form CRS should cover, including firms’ differing legal obligations, fee structures and conflicts,” Stein said.

However, Stein said the agency should improve the form in the following ways:

● more clearly highlight how firms differ with respect to conflicts arising from product-level revenue and should clearly identify all forms of revenue associated with particular accounts.

● better organize, streamline and clarify the form; and

● better implement design principles that have been shown to facilitate visual appeal and comprehension.

Betterment doesn’t “just believe that these changes would make Form CRS more effective, we’ve confirmed it through our own investor testing,” Stein said. “That testing indicates that our proposed form, which makes the enhancements listed above, materially improves the form’s value to investors.”

Melanie Waddell

@Think_MelanieW

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