The Securities and Exchange Commission’s Regulation Best Interest continues to grab headlines as two SEC commissioners recently made candid comments about the three-pronged advice-standards package and House lawmakers held the first hearing on the plan. Interest in the package is reaching a fever pitch as the plan is anticipated to be finalized in late summer.

Commissioner Robert Jackson, a Democrat, said at the Investment Adviser Association’s annual compliance event in Washington in mid-March that as it stands now, he can’t support passing the controversial Reg BI, or the advice-standards package’s Customer Relationship Summary disclosure form (Form CRS), because the cost-benefit analysis performed by the SEC thus far is subpar.

The weak economic analysis, Jackson stated, will make the rule a prime target for legal challenges.

“Our economic analysis was not a serious attempt to understand the effects of the rule,” Jackson said during a question-and-answer session. “We did not make any serious attempts to understand the costs and benefits for investors” of the rulemaking, Jackson said.

In comments to reporters, Jackson said that “my own view in what we have right now [in terms of economic analysis] will not stand up.” The agency has “a lot more work to do,” he said, if it plans to set a best-interest standard that is “sustainable.”

If the economic analysis “is not up to snuff, you’re basically giving the market a call option on striking down the rule. The whole point of Reg BI is to enter the space and settle the debate about the duties owed to American investors,” Jackson explained to reporters. “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.”

At another compliance event held in early March in Washington, SEC Commissioner Hester Peirce, a Republican, urged the states that are moving ahead with their own fiduciary/best interest rules to let Reg BI “play out” before they make any final decisions.

Peirce said that it “would be helpful to have a common [best-interest] standard,” and urged Reg BI detractors to look “at the words of the standard closely, [as] they’d see it as actually quite a strong standard.”

In separate comments to IA, Peirce said that she preferred states “see how [the SEC] rule comes out and then let’s have a conversation about what, if anything else, needs to be done. Let’s let our rule play out. The states’ input is really important to us and I just hope they keep working with us in this process.”

Both Peirce and Jackson also have expressed their displeasure with the Regulation Best Interest moniker.

“I’ve been an opponent of the fiduciary name as well because that label has also been used to tell people ‘just find somebody who calls themselves a fiduciary and you’ll be good to go,’” Peirce said.

Jackson told reporters that the standard under the proposal 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.’”

State Fiduciary Provisions Meantime, industry trade groups voiced their opposition on March 13 to legislation in Maryland that includes a measure to impose fiduciary obligations on brokers and advisors, stating the plan would contribute to a “patch-work” of state rules.

Panels in both of Maryland’s legislative chambers held simultaneous hearings in Annapolis on the Financial Consumer Protection Act of 2019. The trade groups urged the Maryland lawmakers to wait on the upcoming Reg BI as it will set a federal standard.

Dale Brown, president and CEO of the Financial Services Institute, told senators that “we have serious concerns” about the Maryland fiduciary provision. “First, the provision would significantly drive up compliance costs for firms; at some point those costs have to be passed on to investors, and at some point that potentially prices the access and choice of advice out of the reach of Main Street Americans.”

As to Nevada’s fiduciary plan, Michael Pieciak, president of the North American Securities Administrators Association and the commissioner of the Vermont Department of Financial Regulation, told the Nevada Securities Division in an early March letter that Nevada’s fiduciary rulemaking does not violate securities laws.

Nevada’s draft regulations “should curb abusive sales practices in Nevada,” Pieciak wrote. “The division will likely receive objections to the draft regulations from the securities industry; however, we must remember the securities industry has proven itself adaptive and can accommodate these new regulations.”

In the field of securities law, Pieciak wrote, “state laws are pre-empted only to the extent they conflict with the federal securities laws.”

Lawmakers Weigh In During a March 14 hearing on Reg BI, Rep. Carolyn Maloney, D-N.Y., who chairs the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, stated that “while the SEC’s Reg BI may be an improvement on the status quo, it is still far too weak,” and that she still has serious concerns with the rule.

The first fault Maloney sees is that Reg BI does not subject brokers to a “full fiduciary duty,” like the Labor Department’s now-defunct fiduciary rule would have required. “Instead, the SEC’s rule says that brokers who provide advice to retail customers have to act in the ‘best interest’ of the customer — but refuses to define ‘best interest.’”

Further, Maloney argued, “instead of saying that brokers have to provide advice ‘without regard to’ their own financial interests — which Dodd-Frank specifically required — the SEC’s rule actually does allow brokers to take their own financial interests into account.”

The Reg BI proposal also “relies far too much on disclosing conflicts of interest, rather than simply eliminating conflicts,’” Maloney stated, adding that the SEC must strengthen the rule.

Rep. Sean Casten, D-Ill., introduced draft legislation during the hearing to require the SEC to conduct usability testing on the agency’s new disclosure forms before finalizing Reg BI, a plan that Maloney said “is an excellent idea.”

Barbara Roper, director of Investor protection for the Consumer Federation of America, told me in separate comments on Casten’s bill that the “SEC has known for years that the disclosures it relies on to inform investors are poorly understood by many if not most retail investors. Instead of acting to address that problem, it has continued to churn out the disclosures that suffer from all the shortcomings in content, wording and design. Form CRS is a prime example.”

The Casten bill, Roper explained, “by requiring the SEC to incorporate qualitative testing earlier in the process of developing disclosures, offers an opportunity to finally and effectively address this problem. No one who cares about investors’ ability to make informed decisions can reasonably oppose this bill.”

The good news about Reg BI, however, Roper stated during her testimony is “that it is fixable. The commission didn’t adopt the approach that we would have preferred — a uniform [fiduciary] rulemaking under Section 913” of Dodd-Frank, she continued, but “it is fixable.”

The first step, Roper argued, is “making the best-interest standard meaningful — it has to require some kind of narrowing of the acceptable options beyond what currently satisfies” the Financial Industry Regulatory Authority suitability standard. Reg BI “currently doesn’t do that.” There’s a footnote in the proposal that says Reg BI “simply codifies” FINRA’s suitability standard on best interest.

“If you just say that brokers have to act in their customers’ best interest but you leave in place all of the kind of toxic incentives … you are going to have, at best, just gross non-compliance with the rule,” Roper said.

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@alm.com.