The Securities and Exchange Commission’s proposed Regulation Best Interest merely codifies the Financial Industry Regulatory Authority’s suitability rule, and must be revamped in order to truly be a “best interest standard” for brokers, consumer advocacy trade groups told SEC Chairman Jay Clayton on Friday.
“Investors reasonably expect that the investment professionals they turn to for advice will recommend the investments and investment strategies they reasonably believe would best meet the investor’s needs,” the groups – which included Better Markets, the Consumer Federation of America and Consumer Action – told Clayton. “Calling the standard that applies to brokers’ recommendations a ‘best interest’ standard reinforces that reasonable expectation.”
However, the groups state that Reg BI, “as drafted and interpreted in the proposing release, imposes no such obligation. Instead, the Release suggests that the intent of the rulemaking is to codify, rather than enhance, protections investors currently receive under FINRA’s suitability standard, which can be satisfied by recommending any of a potentially large number of ‘suitable’ investments.”
The SEC release explicitly states, “in footnote 7,” the groups write, “that the proposed rule’s information collection requirement, the fact that the duty can’t be satisfied through disclosure alone, and the requirement to make recommendations that are consistent with the customers’ best interests all ‘reflect obligations that already exist under the FINRA suitability rule or have been articulated in related FINRA interpretations and case law.’”
The Commission’s “failure to provide any concrete examples of how Reg BI would raise the bar over FINRA suitability” gives the impression that Reg BI is intended to codify, rather than enhance, the existing suitability standard, the groups write.
Examples in the proposal of how brokers “would be required to weigh a variety of factors and, in particular, how they would be required to consider costs when determining what to recommend, are all consistent with, rather than an enhancement to, FINRA’s interpretation and enforcement of its suitability standard,” the groups state.
The groups sent the letter to Clayton after a recent hour-long meeting.