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Investment News: Regulation Best Interest raises bar on investor protection

The following oped was originally published on investmentnews.com on August 7, 2018.

The United States’ extensive history of individual investing has resulted in more options, greater competition and lower costs compared to the rest of the world. Just as the mix of financial products has evolved, with great benefit to everyday investors, our regulatory framework also must evolve to ensure those investors are best protected.

The Securities and Exchange Commission’s proposed Regulation Best Interest (Reg BI) is an important step in that evolution, and one that clearly raises the bar on investor protection.

U.S. Securities and Exchange Commission

For almost 10 years, the financial services industry has advocated for a heightened standard of conduct for broker-dealers when dealing with retail investors across all accounts. Following the financial crisis in 2008, our industry made clear that we firmly support consistent and high standards for interacting with individual clients, including putting the client’s best interest first. Most recently, in 2017, we advocated for the SEC to build upon existing rules enforced by the Financial Industry Regulatory Authority Inc. and adopt a best-interest standard of conduct for broker-dealers that encompasses a duty of loyalty, a duty of care and enhanced up-front disclosures.

Reg BI goes a long way toward meeting those goals. The proposed new best-interest standard under the Securities Exchange Act clearly and significantly raises the bar from the current suitability standard under Finra rules. It also incorporates the intended principles and goals of the former Department of Labor fiduciary rule, but without the excessive and burdensome compliance and litigation risks that were embedded in the DOL rule.

By any measure, the SEC’s proposed best-interest standard materially exceeds the existing Finra suitability standard to the benefit and for the protection of retail customers. Specifically, it enhances broker-dealer conduct standards by adding new and heightened care, disclosure, and conflicts-of-interest obligations.

For example, under Reg BI, recommendations must not only be suitable but in the retail customer’s “best interest.” This means broker-dealers cannot put their interests ahead of the interests of the retail customer. In addition, broker-dealers must more heavily weigh the cost of a security or strategy in determining whether to recommend the security or strategy.

Under Reg BI, broker-dealers must mitigate financial conflicts of interest. Disclosure of a financial conflict alone also is not considered adequate under the proposed rule, effectively holding broker-dealers to a higher standard than the one applicable to investment advisers today. Coupled with the far more frequent regulatory exam rate for broker-dealers, SEC and Finra enforcement and oversight, and the private right of action afforded to retail customers through Finra arbitration, the new SEC proposal represents a true best-interest standard with real teeth. In many ways it would provide greater protection for retail customers than the current regulatory regime for investment advisers.

Crucially important for investors is that Reg BI specifically seeks to preserve access and choice while providing protections in the areas the Department of Labor’s “conflict of interest” rule sought to address. The proposed new standards — together with existing standards — address the intended principles, goals, elements and protections of the former DOL fiduciary rule. At the same time, it avoids the many shortcomings that were embedded in the DOL fiduciary rule, such as those that threatened to lead to greater cost, less choice, and fewer professional services and options for retirement savers.

Further, the SEC’s proposed Reg BI applies more broadly than the DOL fiduciary rule because it applies to all retail customer accounts, not just retirement accounts, and will allow the SEC to enforce a common standard across the industry.

The proposal is also appropriately a principles-based, facts and circumstances approach, similar to the fiduciary standard applicable to investment advisers under the Advisers Act.

Our general support notwithstanding, there are some areas where the proposals need clarification, modification or additional guidance to ensure a workable final rule that would most efficiently benefit investors. Our concerns, as we detail in our comment letter to the SEC, focus primarily on the scope of certain terms and on practical implementation issues.

We also believe the SEC should adopt a simplified and more flexible approach to the new proposed required relationship summary (Form CRS). For example, a shorter form that includes links to provide investors with more information would be far more effective at conveying information in a way that retail investors can understand. We believe there should not be a one-size-fits-all Form CRS — greater flexibility is needed to accommodate various business models, given that different firms offer different products and services.

On balance, the SEC proposal puts regulators, industry and, most importantly, investors, in a much better starting point than where we ended with the DOL rule. It represents a clear path forward that is both workable for the industry and preserves investor choice. Change doesn’t come easy, nor does it come cheap. For our industry, the costs to comply with the newly proposed rule will no doubt be significant, but, we believe, manageable. At the end of the day, the benefits to retail customers of a heightened standard of conduct are clear, making it a worthwhile investment for our members in the interest of their clients.

The time to act is now. We urge the SEC to swiftly evaluate the feedback received during the comment period and move forward the rulemaking to ensure investors’ interests are protected while maintaining their choice of and access to investment advice.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, a trade group representing the securities industry.

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