Best the SEC can do or huge step backward? Industry leaders tussle over advice reform

Disagreement surrounds the effectiveness of Regulation Best Interest to meaningfully reduce conflicts

Dec 5, 2018 @ 5:02 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission's proposal to raise investment advice standards for brokers doesn't represent a big change from current regulations but is about as far as the agency can go right now, the leader of an brokerage trade association said Wednesday.

Dale Brown, president and chief executive of the Financial Services Institute, said the centerpiece of the SEC proposal, so-called Regulation Best Interest, which would require brokers to act in the best interests of their clients, would make a modest impact.

"Is Reg BI as proposed a substantial improvement over the current suitability standard? No. It's not," Mr. Brown said at the MarketCounsel Summit in Las Vegas. "I think it's probably what Chairman Clayton feels that he can get at least two other … commissioners on the SEC to agree to."

Jay Clayton will need to obtain three votes on the five-member commission to pass a final rule package. The panel could decrease to four members after Democratic commissioner Kara Stein departs at the end of the month, and will remain at less than full strength until a successor is confirmed by the Senate.

The SEC has taken the lead from the Labor Department on setting a new advice standard after the DOL's fiduciary rule died in court earlier this year. Proponents of the DOL rule said it was tougher than what the SEC is contemplating — which would continue to regulate separately brokers and investment advisers, who would continue to held to a fiduciary standard.

Mr. Brown praised the give-and-take compromises that have led to the SEC proposal.

"We don't live in a perfect world where we can just say, 'This is what would be best and let's just sprinkle fairy dust and make that happen,'" he said. Regulation BI "will be an improvement, hopefully, on the status quo."

But the champion of the DOL rule, former assistant secretary of Labor Phyllis Borzi, warned the MarketCounsel audience about the SEC's approach on the potential regulation.

"It would be a huge step backward for the fiduciary community," she said on a panel following Mr. Brown's appearance.

Regulation BI isn't an answer, said Knut Rostad, president of the Institute for the Fiduciary Standard. He said it relies on disclosure to mitigate broker conflicts of interest.

"Reg BI is a broker standard," Mr. Rostad told the audience. "It's not a fiduciary standard."

The FSI was one of the industry plaintiffs in the lawsuit that killed the DOL rule. Mr. Brown said it would have been too costly for brokers and would have priced investors with modest assets out of the advice market.

"A key component of investor protection is access to affordable advice," Mr. Brown said.

He was challenged by a member of the audience, who said investors could be helped by adviser who charge an hourly fee.

"There are not enough hourly-based providers," Mr. Brown said.

MarketCounsel president Brian Hamburger asked the audience members — mostly registered investment advisers — how many would take on an account of less than $100,000. Among many attendees, only two hands went up.

"That highlights the problem as to why there can't be one answer," Mr. Hamburger said.

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