Witnesses at a March 14 hearing held by the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets called on the Securities and Exchange Commission (SEC) to strengthen its investment advice reform proposal.
Rep. Carolyn Maloney, D-NY, chairwoman of the subcommittee, said in her opening statement that the SEC’s Regulation Best Interest (BI), which is designed to raise broker conduct above the current suitability standard, falls short of needed investor protections. She asserted that the SEC proposal relies too much on disclosure of conflicts of interest rather than their elimination. She also argued that the regulation does not subject brokers to a full fiduciary duty, despite the staff recommendations to do so, and that it does not clearly define “best interest.” Instead of saying that brokers have to provide advice “without regard to” their own financial interests, she observed that the SEC’s rule would allow brokers to take their own interests into account.
Rep. Bill Huizenga, R-MI, the highest-ranking Republican on the panel, backed the SEC proposal, contending that under the proposed regulation, “consumers will be able to make more informed decisions about the types of financial professionals which would be able to meet their needs …” He also said that the proposal “allows investors greater choices and access to the products and services they require.”
Susan McMichael John, chair of the Certified Financial Planner (CFP) Board of Standards, expressed concern that as a practical matter, the proposal does not offer increased investor protection. She emphasized that a final rule must include explicit fiduciary protections for retail investors, regardless of the business model under which that advice is provided.
Barbara Roper, Director of Investor Protection at the Consumer Federation of America, said that without “substantial improvements” by the SEC, the proposal is “likely to do more harm than good by misleading investors into expecting protections that the rule simply does not provide.” She added that it was still possible for the SEC to adopt sufficient changes to the regulation for it to earn its “best interest” label. She explained that the SEC could do this without having to restart its rulemaking process by adopting a handful of changes to the regulatory text, including clarifying what it means by “best interest.”
Among the witnesses, the lone defender of the rule was former SEC chairman Harvey Pitt, the chief executive of Kalorama Partners, a Washington, D.C. consulting firm. He testified that the SEC’s proposal was well thought out and offers an important standard that is not too restrictive. He said that the proposal should be considered as an initial first step and that changes could still be made.
A separate component of the hearing was draft legislation from Rep. Sean Casten, D-IL, that would require the SEC to conduct usability tests regarding the agency’s disclosures to retail investors. The bill would help ensure that the disclosures developed by the SEC are designed to convey information that investors are more likely to read, thereby helping them make better, more informed investment decisions.
It’s important to view this hearing in the context of the larger political fight which has been playing out over the past several years, first over the Department of Labor’s fiduciary rule and now the SEC’s Reg BI. As the SEC prepares to finalize their rule, this hearing and the subsequent mark-up of Rep. Casten’s bill was seen by some as a late-in-the-game political attempt to slow down the final rule. With the strict partisan vote out of Committee, the attempt will likely fall flat.
As it stands now, industry officials anticipate a final version of the SEC rule by the end of this summer. We’ll keep you posted.
Investment News, “House Democrats call on SEC to strengthen Regulation Best Interest,” Mark Schoeff Jr., March 14, 2019
ThinkAdvisor, “SEC Reg BI’s economic analysis too weak, will face legal challenges: SEC’s Jackson,” Melanie Waddell, March 14, 2019
NAPA Net, “SEC’s Reg BI still ‘far too weak,’ witnesses at House hearing say,” Ted Godbout, March 15, 2019
Blog header image: Koki Jovanovic/Stocksy.com
Senior Analyst Retirement Research, Invesco Consulting
Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.