SEC head defends Reg BI, but only succeeds in igniting more criticism

A top critic charges Jay Clayton with 'gamesmanship' and creating a 'false narrative'

Jul 9, 2019 @ 2:20 pm

By Mark Schoeff Jr.

Securities and Exchange Commission Chairman Jay Clayton took on critics of the agency's recently approved investment advice reform package in a lengthy defense Monday, but his remarks didn't calm the fierce debate.

In a speech Monday in Boston at Babson College, Mr. Clayton addressed "criticism and misinformation" about the new advice measures, which passed in the SEC in a 3-1 vote on June 5.

They include Regulation Best Interest, designed to raise the broker standard, an interpretation of the fiduciary standard that will continue to apply to investment advisers, and a client relationship disclosure, Form CRS.

"I believe that much of the criticism — which focused broadly on the extent of the investor protections under Reg BI and our fiduciary interpretation — is false, misleading, misguided, and unfortunately, in some cases, is simply policy preferences disguised as legal critiques," Mr. Clayton said.

In an interview and a series of tweets on Tuesday, Barbara Roper, director of investor protection at the Consumer Federation of America, essentially told Mr. Clayton: Right back at you.

"He is mischaracterizing our arguments in order to create a false narrative," said Ms. Roper, a member of the SEC Investor Advisory Committee. "That's not honest disagreement about policy. That's just gamesmanship."

SEC member Robert Jackson Jr., the commission's lone Democratic appointment and only vote against the reform package, assured critics that a reconstituted SEC in a Democratic presidential administration will take another shot at advice reform.

In Boston, Mr. Clayton responded to several criticisms made by rule detractors. Among them:

Claim: Reg BI will not do enough to protect retail investors.

He emphasized Reg BI's disclosure, care, conflict of interest and compliance obligations set a higher bar for broker conduct than the current suitability standard, and that brokers must affirmatively act in their customers' best interests.

He chided critics for faulting Reg BI for "failing to require elimination of all conflicts of interest," which he implied was impossible.

Ms. Roper tweeted: "We've faulted Reg BI for allowing firms to artificially create conflicts that undermine the best interest standard and for failing to do anything meaningful to ensure those conflicts don't taint recommendations."

Claim: Reg BI is deficient because it does not require a broker to recommend the best investment product.

"Neither investment advisers nor broker-dealers are required to recommend the single 'best' product," Mr. Clayton said. "Many different options may in fact be in the retail investor's best interest, and what is the 'best' product is likely only to be known in hindsight."

Ms. Roper tweeted: "We asked for a principles-based definition to make clear that brokers, and advisers, must recommend the investments and investment strategies they reasonably believe are best for the investor."

Claim: The fiduciary interpretation weakens the existing fiduciary duty applying to investment advisers.

Mr. Clayton tackled the criticism that the interpretation waters down fiduciary duty by saying an advisory firm must "not place its own interests ahead of its client's interests."

"They would prefer the formulation that an adviser must 'put its client's interest first,'" Mr. Clayton said. "I have no qualms with ... an adviser saying that they 'put their client's interest first' — as our fiduciary interpretation recognizes; that is a plain English formulation of the legal standard that may be more understandable to retail clients."

Claim: The fiduciary interpretation weakens fiduciary duty by not requiring advisers to avoid all conflicts

"There is no legal or regulatory basis for this claim," Mr. Clayton said.

Ms. Roper tweeted: "No one said advisers should avoid all conflicts. The complaint is that the SEC wrote the obligation to seek to avoid avoidable conflicts out of the standard entirely."

In addressing other claims, Mr. Clayton said that neither Reg BI nor fiduciary duty can be satisfied by disclosure alone. He said Reg BI does not require a broker to monitor a customer account or impose an ongoing duty of care because doing so would be inconsistent with the "solely incidental prong" of the broker exclusion from the law that governs investment advisers.

Mr. Clayton's Boston appearance was the first of what he said will be an ongoing SEC investor outreach and education program.

"This isn't a debate about the best policy approach," Ms. Roper said. "This is a sales job."

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