Securities and Exchange Commission Chairman Jay Clayton on Monday rebuked criticisms that the agency’s recently approved Regulation Best Interest for brokers should have defined the term “best interest.”
In comments to investors at a Monday roundtable in Boston, Clayton defended Reg BI and argued that the rule is not “deficient” because it fails to define “best interest.”
During the run-up to the rule’s passage, “differing views were expressed regarding whether the standard should be more principles-based or more prescriptive — and in particular, whether to provide a detailed, specific, situation-by-situation definition of ‘best interest’ in the rule text,” Clayton said.
While the securities regulator “considered this issue very carefully,” he continued, “our view was that the best approach would be to apply the specific component obligations of Reg BI, including the ‘best interest’ requirement in the Care Obligation, in a principles-based manner.”
Under Reg BI, Clayton said, “whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of how the specific components of the rule are satisfied.”
This principles-based approach “is a common and effective approach to addressing issues of duty under law, particularly where the facts and circumstances of individual relationships can vary widely and change over time, including as a result of innovation,” he stated.
Determining what is in the “best interest” of a retail customer “is similar to an investment advisor’s fiduciary duty, which has worked well for advisors’ retail clients and our markets,” Clayton maintained.
“Indeed, there is no definition of ‘best interest’ under the Advisers Act.”
Clayton went on to state that “neither investment advisors nor broker-dealers are required to recommend the single ‘best’ product. Many different options may in fact be in the retail investor’s best interest, and what is the “best” product is likely only to be known in hindsight.”
In short, he said, “it is appropriate and symmetrical for both standards to use a principles-based approach to determining ‘best interest.’”
Barbara Roper, director of investor protection for the Consumer Federation of America, called Clayton’s comments “straw man arguments.”
The consumer group “made clear that we weren’t expecting them [the SEC] to identify the single best investment available anywhere in the market, and that often more than one investment would fulfill that obligation,” Roper told ThinkAdvisor in an email message on Tuesday. “But we did ask them to clarify that brokers would be required to narrow down the pool of acceptable options beyond what is required under suitability. They refused to do that, leaving us to wonder how the SEC’s obligation to make recommendations ‘in’ the customer’s best interest is any different from FINRA’s interpretation of suitability as requiring brokers to make recommendations ‘consistent with’ the investor’s best interest.”
Clayton also defended in his Monday remarks the agency’s decision to maintain “regulatory distinction” between investment advisors and broker-dealers.
“A number of commenters expressly or impliedly advocated for regulation that would collapse the distinction, with a substantial majority of those commentators favoring the generally applicable investment advisor model where clients pay an asset-based fee or a flat fee for generally broad-based financial advice from a fiduciary,” Clayton said.
While “this is a good model, and for many investors, this type of investment advisor relationship may better match their needs than the typical broker-dealer relationship,” Clayton continued, “for many other investors, the broker-dealer model, particularly after the implementation of Reg BI — either alone or in combination with an investment advisor relationship — provides the better match.”
— Check out The Long, Uncertain Road to Implement Reg BI on ThinkAdvisor.