Clayton says disclosure sufficiently mitigates some conflicts under Reg BI

SEC chairman says guiding principle should be: 'What would a reasonable investor expect?'

Mar 26, 2019 @ 2:04 pm

By Mark Schoeff Jr.

Securities and Exchange Commission chairman Jay Clayton said brokers' disclosure of conflicts of interest would sufficiently address some of them under a measure to raise investment advice standards.

The agency's proposed Regulation Best Interest would require brokers to identify and mitigate conflicts. But there is confusion about whether disclosure or mitigation is more important.

In remarks to a Securities Industry and Financial Markets Association conference via video Tuesday, Mr. Clayton said compliance with Regulation Best Interest would depend on the context.

For instance, if a broker discloses that she receives a commission and tells a customer how much she's being paid, that would satisfy the measure, Mr. Clayton said. But product-specific sales contests would have to end.

"In some cases, disclosure is enough mitigation," Mr. Clayton said. "In some cases, the only thing to do is eliminate [a conflict]."

The final rule will provide more specifics, Mr. Clayton said. But he added that the guiding principle would boil down to this: "What would a reasonable investor expect?"

Under the SEC proposal, brokers would have to act in the best interests of their clients. They would be regulated separately from investment advisers, who would continue to adhere to a fiduciary duty.

Mr. Clayton's approach relies too much on disclosure, according to Matthew Wolniewicz, president of Fi360, a fiduciary education, training and technology company. He said studies have shown investors don't read or understand disclosures.

"I don't think disclosure is the answer to solving the fiduciary question," said Mr. Wolniewicz, who was not at the SIFMA conference in Phoenix. "Does [Regulation Best Interest] achieve a true fiduciary standard? Not in its current state."

As he has in previous public appearances, Mr. Clayton declined to provide a time line for release of the final investment advice reform rule. Most observers are expecting it sometime this summer.

"This is a priority for me," Mr. Clayton told SIFMA president and chief executive Kenneth Bentsen Jr. in the video interview. "We're moving quickly. I'm not going to put a specific date on it. But sooner rather than later is always my view."

Critics of the SEC's proposal said it will be weaker than the now-defunct Labor Department fiduciary rule, which would have applied to advice standards for retirement accounts. But Mr. Clayton defended the SEC measure, asserting it would raise broker conduct requirements above the current suitability standard, clarify the fiduciary standard for investment advisers and require disclosures about fees and services to investors.

Although brokers and advisers won't be brought under the same standard by the SEC proposal, the outcome will be similar when they work with their clients, Mr. Clayton said. He gave the example of a customer seeking advice on rolling assets out of a 401(k) plan and into an individual retirement account.

"My expectation is that you would treat the customer in much the same way, whether you're a broker-dealer, an investment adviser or … both," Mr. Clayton said.

He expressed confidence that the final rule would be effective.

"It's straightforward, overdue and I think we're going to get it right," Mr. Clayton said.


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