Stakeholders told a House subcommittee Thursday that the Securities and Exchange Commission’s standards-of-conduct proposal needs work before a final rule is issued later this year.
“While we appreciate the opportunity the rule proposals represent, our concern is that they offer the appearance, but not the reality, of increased investor protection,” said Susan MacMichael John, president of Financial Focus, an advisory firm, and chairwoman of Certified Financial Planner Board of Standards, in testimony before the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets. “However, if the proposed rules are strengthened, we believe the commission may realize its goal of increasing investor protection.”
Last year, the SEC approved a standards-of-conduct package, which has become commonly known as Reg BI for one of the three legs of the proposal, which includes a best-interest standard that compels brokers to put clients’ financial interests ahead of their own and requires them to mitigate financial conflicts.
The client relationship summary, or Form CRS, requires firms to disclose to retail investors the nature and scope of their services, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm’s disciplinary history.
Lastly, a standard of conduct for investment advisers states advisers have a duty to act and provide advice that is in the best interest of the client.
During a comment period that ended in August, the SEC received more than 6,000 comments on the proposed package. The agency said it will issue a final rule by September.
Broadly, Republicans on the subcommittee were more supportive of the current proposal than their Democratic counterparts. In her opening remarks, Chairwoman Carolyn B. Maloney, D-N.Y., said that while the SEC’s rule states that brokers who provide advice to retail customers have to act in the best interest of the customer, it “refuses to define ‘best interest.'”
Rep. Bill Huizenga, R-Mich., said the proposal is not perfect but the commission is taking meaningful steps to listen to stakeholders. Reg BI will allow consumers “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 that they require,” Mr. Huizenga added.
Barbara Roper, director of investor protection for the Consumer Federation of America, said the proposed package does not create an unambiguous obligation for brokers to do what is best for their customers. “As a result, investors would be misled into expecting protections the rule does not provide and relying on advice tainted by conflicts of interest,” she said.
It’s unclear whether Reg BI improves on the protections already afforded investors under the Financial Industry Regulatory Authority’s suitability standard that currently governs brokers’ sales recommendations, Ms. Roper added.
The average investor doesn’t understand the intricacies of investing, Dina Isola, an investment adviser representative with Ritholtz Wealth Management, told the subcommittee. “They don’t understand that the person giving them advice isn’t representing their best interest,” Ms. Isola said. “So anything that’s done that keeps that murky or unclear is just going to create confusion and leave the door open for gross abuses.”
Lee Baker, president of AARP Georgia, said the proposed Form CRS will lead to confusion for investors and urged the SEC to make changes.
Harvey L. Pitt, former SEC chairman and current CEO and managing director of consulting firm Kalorama Partners, who was most supportive of the proposal among the five witnesses Thursday, said the package is substantial and well-planned. “The commission has done the right thing. It has sought investor views on this, and it is continuing to refine those issues,” Mr. Pitt said.
Groups such as the Securities Industry and Financial Markets Association, the American Council of Life Insurers and the Insured Retirement Institute each wrote to the subcommittee expressing support for Reg BI.