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SEC Reg BI's Economic Analysis Too Weak, Will Face Legal Challenges: SEC's Jackson

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SEC Commissioner Robert Jackson said Thursday that the economic analysis supporting the agency’s advice-standards package, including Regulation Best Interest, is too weak and that it will face legal attacks.

Noting that he voted to put the proposed rule out for comment, Jackson stated that he made “very clear” last year that he couldn’t support the plan “as a final rule.”

As it stands now, with industry officials anticipating a final rule by the end of summer, Jackson, responding to questions at the Investment Adviser Association’s annual compliance conference in Washington, said the agency still “has a long way to go.”

Karen Barr, IAA’s president and CEO, who was interviewing Jackson, asked him if a final rule would be out by the next quarter.

(Related: Trade Groups Urge Maryland Lawmakers to Wait for SEC Reg BI)

Jackson noted that the shutdown pushed back the agency’s agenda somewhat, but that “I think you’re right to think about [a final rule] in the next quarter or so,” adding that the SEC staff “will have to really dig in” to get something before the commission by that time.

“For me one of the things about the proposal was that our economic analysis was not a serious attempt to understand the effects of the rule,” Jackson said.

“We did not make any serious attempts to understand the costs and benefits for investors” of the rulemaking, Jackson told attendees.

In comments to reporters on the sidelines of the event, Jackson said that “my own view in what we have right now [in terms of economic analysis] will not stand up” on both Reg BI and on the Customer Relationship Summary form, or Form CRS.

Jackson continued: “The reason we’re doing Reg BI is because conflicted advice costs investors money.… We made no attempts to assess those costs. I can’t imagine a serious judge looking at the economic analysis and upholding it on a cost-benefit challenge.”

“If the goal here is to set a standard that is sustainable, that will hold up, and that won’t lead to more lobbying and litigation, I think we have a lot more work to do.”

At this point, Jackson stated, the agency “could get to a final [rule] without the need for a re-proposal. We just need to do more work.…”

“If the [economic] analysis is not up to snuff, you’re basically giving the market a call option on striking down the rule. I think the whole point of Reg BI is to enter the space and settle the debate about the duties owed to American investors. And to the degree that industry retains a call option to get it struck down in the D.C. Circuit, I don’t think that goal has been achieved.”

The best-interest standard, Jackson added, “has to be clearer. The standard says the broker-dealer can’t put their interest ahead of the client. That’s a bit of a contorted sentence, it’s hard to understand, even for me, I’ve read it a few times now. I don’t understand why don’t we just say what everyone says the law should be, which is ‘your duty is to put investors first.’”

As to whether SEC Chairman Jay Clayton will get the three votes he needs on the three-pronged plan, Jackson stated, “I will continue to fight and make every effort to give the chairman the opportunity to have a bipartisan rule. I think that’s best for the marketplace, it’s best for the commission and it’s best for investors.”

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