House Democrats are calling on the Securities and Exchange Commission to strengthen its investment advice reform proposal.
In the first hearing about the measure since the party took over the House in
last year's elections, Rep. Carolyn Maloney, D-N.Y., said the SEC's so-called
Regulation Best Interest, which is designed to raise broker conduct above the current suitability standard, falls short of needed investor protections.
"While the SEC's Reg BI may be an improvement on the status quo, it is still far too weak," Ms. Maloney, chairwoman of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets,
said at a meeting of the panel Thursday.
Unlike the
now-defunct Labor Department fiduciary rule, Ms. Maloney asserted the SEC proposal relies too much on disclosure of conflicts of interest rather than their elimination. Sean Casten, D-Ill., indicated at the hearing he is working on a bill that would require the agency to conduct usability tests regarding disclosures to retail investors.
Ms. Maloney also said the SEC measure would allow brokers to take their own financial interests into account when working with clients.
"Taken together, these shortcomings mean the SEC's rule will still leave retail investors dangerously exposed to substantial losses caused by advice from hopelessly conflicted brokers," Ms. Maloney said.
The highest-ranking Republican on the panel backed the SEC proposal.
"The proposed regulation significantly raises the stand of care by formally establishing the customer's best interest as the overarching standard of care," said Rep. Bill Huizenga, R-Mich. "Consumers will be able to make more-informed decisions about the types of financial professionals which would be able to meet their needs, and allows investors greater choices and access to the products and services they require."
With Democrats in control of the subcommittee, the hearing was dominated by witnesses who questioned the SEC rule.
"Unless the commission is prepared to adopt substantial improvements to Reg BI ... it is likely to do more harm than good by misleading investors into expecting protections that the rule simply does not provide," Barbara Roper, director of investor protection at the Consumer Federation of America, told lawmakers.
Former SEC chairman Harvey Pitt was the only witness who defended the SEC measure. He praised current SEC chairman Jay Clayton for putting advice reform on the table — an issue that has long flummoxed the agency.
"In only two years, the commission has come forward with a very substantial, thoughtful proposal," said Mr. Pitt, chief executive of Kalorama Partners. "The proposed regulation should be seen as an initial step, not as a final step."
Ms. Roper said the measure should be improved by defining the term "best interest," requiring that brokers recommend the best available investment and by requiring that firms implement policies and procedures designed to prevent brokers from putting their interests ahead of their clients' interests, among other steps.
"There is a positive message here," Ms. Roper said in an interview. "It is fixable. There's still time."
Rep. Brad Sherman, D-Calif., asked witnesses whether the SEC proposal was better than the status quo. Everyone except Mr. Pitt answered "no."
"[Having] no rule is better than this rule," said Susan John, chairwoman of the Certified Financial Planner Board of Standards Inc. "The rule undercuts what existed before."
