SEC Regulation Best Interest allows harmful broker practices, state regulators say

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NASAA asserts industry support of proposal proves it needs to be beefed up.

State securities regulators are warning the Securities and Exchange Commission that the agency’s investment advice reform proposal will allow brokers to continue practices that harm investors.

The North American Securities Administrators Association criticized Regulation Best Interest, the centerpiece of the SEC measure designed to raise the broker advice standard by requiring brokers to act in the best interests of their clients.

But in a recent comment letter, state regulators said the brokerage industry is interpreting the SEC proposal as giving them free rein to provide conflicted advice as long as the conflicts are disclosed. They said financial industry trade associations’ embrace of Regulation Best Interest demonstrates that it won’t introduce reform.

“These groups point to the Commission’s 'interpretive nuances’ as confirmation that pretty much anything and everything will be considered 'acting in the client’s best interest’ — where disclosure occurs,” wrote Vermont financial regulation commissioner and NASAA president Michael Pieciak. “To these industry groups, no abusive product or practice appears to be off limits.”

NASAA said the final SEC regulation should address specific types of broker conduct, such as engaging in sales contests, selling a limited number of high-cost products, taking revenue-sharing payments, making rollover recommendations and making recommendations on account types.

“When the Commission states in the Reg BI proposal, repeatedly, that the new standard of conduct would not require broker-dealers to eliminate any conflicts, neutralize compensation, or even generally recommend lower-cost, less-remunerative, or less-risky products to retail investors, broker-dealers naturally feel no pressure to do so,” the state regulators wrote. “If the Commission wants these harmful practices to stop, it must say so both in the rule and in the adopting release.”

An SEC spokesman declined to comment. A final SEC advice rule is expected this summer.

The state regulators cited comment letters from the Securities Industry and Financial Markets Association and the American Council of Life Insurers as examples of how the brokerage industry doesn’t intend to change under Regulation Best Interest.

Kevin Carroll, SIFMA managing director and associate general counsel, pushed back, saying NASAA favors a regulation similar to the now-defunct Labor Department fiduciary rule that would impose “burdensome, costly and unnecessary requirements that don’t have a corresponding investor-protection benefit.”

Under Regulation Best Interest, the broker standard would be raised in a way firms can manage, he said.

“The SIFMA approach has been focused on helping to ensure firms can operationalize their regulatory requirements while still keeping the promise of Reg BI to deliver meaningfully heightened conduct standards and better investor experience when interacting with their financial professional,” Mr. Carroll said.

The ACLI countered that the fiduciary standard NASAA supports — and which would continue to apply to investment advisers under the SEC regulation — is impractical.

“NASAA’s suggestion that ACLI’s support for Reg BI signals a problem is nonsense,” ACLI spokesman Jack Dolan wrote in an email. “We’re committed to retirement solutions that protect all Americans. A fiduciary regulation would harm the very people it is intended to help — low- to moderate-income retirement savers.”

But an investor advocate cheered the state regulators’ criticism of the SEC proposal.

“It was the perfect letter to point out that Reg BI is written by the brokerage industry for the brokerage industry so that brokers can pretend they act in the best interest of their clients,” said Ron Rhoades, assistant professor and chair of the financial planning program at Western Kentucky University. “The states are putting the SEC on notice: 'We’re not going to follow you in supporting a best interest standard that is meaningless.’”