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.”