What You Need to Know
- The SEC has never really defined 'best interest' for the purposes of Reg BI, consumer advocate Barbara Roper says.
- Reforming broker and advisor regulation “should be a top priority because it affects the most vulnerable investors,” she says.
- New Labor guidance makes obligations clear, she says.
The Consumer Federation of America urged Securities and Exchange Commission Chairman Gary Gensler to prioritize reforming broker-dealer and investment advisor regulation — primarily by adopting a principles-based definition of “best interest” in Reg BI.
“CFA has greeted each new SEC Chair with a plea to reform the regulation of broker-dealers and investment advisers,” Barbara Roper, director of investor protection for the group, said Monday in a letter.
“We have warned them that regulatory reform is needed to keep pace with changes in the marketplace and to ensure that investor protections match investors’ reasonable expectations of the investment professionals they rely on in making decisions that are critical to their financial wellbeing.”
Roper continued that “time and again” CFA has noted that reforming broker and advisor regulation “should be a top priority because it affects the most vulnerable investors.”
Unfortunately, “despite the extensive attention this issue received in the previous administration, the need for a fresh approach to this issue remains undiminished,” Roper said.
Reg BI ‘Too Weak’
While Roper said that Regulation Best Interest doesn’t need to be scrapped, the rule, she said, is “too weak.”
The requirement to act in the customer’s best interest that lies at the heart of both Reg BI and the Advisers Act fiduciary duty “has no generally accepted meaning under the securities laws,” Roper wrote.
For these standards to have any impact, she argued, the commission “must adopt a principles-based definition of best interest either through guidance or, if necessary to give the requirement greater weight and permanence, through rulemaking.”
‘Spell Out’ What Best Interest Means
In a separate Tuesday email to ThinkAdvisor, Roper explained that under Reg BI, “you meet your best interest obligation by making recommendations in the best interest of the customer, and no one knows what that means and the SEC has said very little to clarify that concept.”
Furthermore, Roper said, “‘best interest’ has been used to describe the previous FINRA suitability rule, the Advisers Act fiduciary guidance, and the 2016 DOL fiduciary rule, which are very different standards. Traditionally, as interpreted by the SEC, ‘best interest’ hasn’t meant much, and it’s not clear Reg BI changed that.”
CFA believes the SEC needs “to spell out in general, principles-based terms what ‘best interest’ means and to do so in a way that makes clear it is a higher standard than FINRA suitability,” Roper said.
The consumer group previously relayed to former SEC Chairman Jay Clayton what such a “best interest” definition should entail.
For instance, while “the Commission had made clear in its Rule Release that brokers were not expected to identify the single ‘best’ option for the investor, it had failed to make clear what they were required to do to comply with their best interest obligations,” Roper states.