Investor advocates slam SEC advice reform on eve of Reg BI vote

Barbara Roper says the new regulations 'will mislead investors into expecting protections the rules do not deliver and deprive them of protections they currently receive'

Jun 4, 2019 @ 2:31 pm

By Mark Schoeff Jr.

Investor and consumer advocates slammed a Securities and Exchange Commission investment advice reform package Tuesday, the eve of a final vote on the regulations.

The Public Investors Arbitration Bar Association, the Consumer Federation of America and Better Markets asserted the centerpiece of the SEC's effort — Regulation Best Interest — would not raise broker advice requirements above the current suitability standard.

They also warned the SEC would weaken the fiduciary standard that applies to investment advisers by interpreting that it can be satisfied through disclosure rather than taking a tougher approach to conflicts of interest.

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The pending rules "are a complete betrayal of the Mr. and Ms. 401(k) investors SEC chairman Jay Clayton pledged to protect when he undertook this rulemaking," Barbara Roper, director of investor protection at the Consumer Federation of America, said on a media conference call. "They will mislead investors into expecting protections the rules do not deliver and deprive them of protections they currently receive."

The SEC declined to comment. The agency will vote on so-called Reg BI and other parts of the package Wednesday.

Ira Hammerman, executive vice president and general counsel at the Securities Industry and Financial Markets Association, a trade group that represents the brokerage industry, defended Reg BI. He said it would require more diligence and prudence from brokers than suitability.

"This is a material advance to the professionalism of the broker-dealer industry, which also is going to help mom and pop investors and improve the quality of advice," Mr. Hammerman said.

He questioned why Reg BI critics were attacking before the final rule is released.

"What's perplexing to me is how the consumer groups can be so adamant in their hostility to the rule if they haven't seen it," Mr. Hammerman said.

The groups admitted they haven't seen the final rules, but are confident — based on meetings with SEC officials and statements from them —they won't change much from the rules proposed more than a year ago.

"If all of these concerns we've raised about the proposals for months and months are suddenly addressed Wednesday when they vote on it, we will issue a huge apology to the SEC," Ms. Roper said. "It's not going to happen. The best we're going to get are some very minor tweaks to Reg BI, for example."

PIABA president Christine Lazaro said the care, conflict and disclosure requirements of Reg BI will not change broker practices, such as revenue sharing and financial incentives to sell proprietary products, which create conflicts of interest.

"Instead of mandating elimination of these most insidious conflicts, it's likely firms will still be permitted to pay brokers more to sell certain products and accept payments from product issuers," said Ms. Lazaro, also a professor of law at St. John's University. "What this means for investors is higher priced products, which ultimately will not be in their best interest."

Mr. Clayton frequently has asserted Reg BI is significantly stronger than the suitability standard brokers must now meet. Under the rule package, investment advisers will continue to have to meet a fiduciary standard when providing advice. Mr. Clayton has said Reg BI will ensure investors receive comparable protections, whether they use a broker or an adviser.

But Ms. Roper said she has "heard rumblings" that the SEC's interpretation of the Investment Advisers Act will diminish the adviser standard by focusing on disclosure. She said most advisers already avoid conflicts and put their clients' interests ahead of their own.

"What we can't understand is why [the SEC is] weakening the Advisers Act standard when the vast majority of advisers embrace a higher standard than the commission is willing to enforce," Ms. Roper said.

She warned that the SEC rule package is vulnerable to a court challenge due to problems with the legal standard and economic analysis on which it's based. She also predicts that if the 2020 election changes control of the White House, advice reform will be revisited.

"I think it's safe to assume this regulation will have a very short shelf life," Ms. Roper said. "I would expect a new administration, a new SEC to make it a priority to re-open this rulemaking and replace it with a true best-interest standard that's designed to protect investors and not the industry."

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