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Regulation and Compliance > Federal Regulation > SEC

Consumer Group Presses SEC's Gensler to Define 'Best Interest'

By Melanie Waddell

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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.

“That problem has yet to be rectified,” Roper continued. “To correct this central failure of the rule, the Commission must emphasize, first, that the best interest obligation applies, not just to the recommendation of individual securities, but also to recommendations of investment strategies, accounts, and services.”

Further, the SEC “must make clear that, to satisfy the best interest standard, brokers must recommend the investments, investment strategies, accounts, and services that they reasonably believe are the best option for the investor from among those they have reasonably available to recommend,” Roper explained.

Roper added that “the pool of investments that satisfy a best interest standard in a particular situation should be significantly narrower than the large number of investments that would typically satisfy the FINRA suitability standard replaced by Reg BI.”

The SEC’s new guidance on the Investment Advisers Act fiduciary standard “is similarly flawed” to Reg BI, Roper contends, as “its fiduciary duty as enforced is more theoretical than real, as it continues to over-rely on disclosure without any evidence that the required disclosures are effective in protecting investors’ interests.”

Also, the SEC’s Customer Relationship Summary, or Form CRS, “does more to obscure than to clarify important differences between brokers and advisers and thus does not support an informed selection among different types of investment professionals,” Roper argued.

Labor’s New Fiduciary Guidance

Despite their “many flaws,” however, Roper said the regs “can provide a framework on which to build a more robust regulatory approach,” as the Labor Department recently demonstrated in releasing new guidance on its fiduciary advice rule.

Labor, Roper said, based its prohibited transaction exemption on Reg BI.

“Like Reg. BI, it includes an obligation to act in the best interests of the customer and to have policies and procedures to mitigate conflicts of interest,” Roper explained.

With its new guidance, Labor “makes clear that these obligations, properly implemented, can have an impact,” Roper maintained.

The guidance makes clear, for example, “that superficial conflict mitigation will not suffice; DOL expects firms to take meaningful steps to rein in conflicts present in their business model and not to create harmful incentives that are likely to undermine compliance,” Roper wrote.

It also makes clear, she continued, “that determinations that rollover recommendations are in the best interest of the retirement investor must be based on a thorough analysis, including the long-term impact of any increased costs that may result.”

Said Roper: “While much work remains to be done, DOL has shown that it is possible to bring real rigor to these requirements where regulators have the interests of investors at heart and the will to face down industry opposition.”

Melanie Waddell

@Think_MelanieW

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