Financial Advisor (May 25, 2018) –The CFP Board of Standards and state securities regulators are among the groups that have sent a letter to Securities and Exchange Commission Chairman Jay Clayton asking for the deadline to be extended for comments on the SEC’s sweeping “Best Interest” regulation.

A diverse, powerhouse coalition of 24 groups wants the SEC to delay the comment deadline for the best-interest regulation and customer relationship summary (Form CRS).

Before the comment period closes, the coalition wants the SEC to ensure that the agency’s “unequal standard for securities professionals” is clearly and effectively conveyed to investors in the agency’s four-page customer relationship summary proposal. The SEC will be testing those CRS proposals with investors, and the coalition wants the comment period delayed for 90 days after the test results are made public. Comments are currently set to close on August 7.

The SEC says it proposed the new initiatives to ensure that brokers operate in the best interests of their customers and disclose conflicts of interest, including their business and compensation practices.

But creating consternation among critics is the fact that the SEC is proposing that only registered investment advisors be required to operate in a fiduciary capacity when working with investors. Brokers and dually registered reps would be subject to the lesser “best interest” standard, which is not defined in the proposal, critics say. The SEC’s four-page customer relationship summary is supposed to explain and clarify this to investors so they know whether they are working with an advisor, broker or dually registered rep.

“If testing shows that the proposed summary disclosures do not provide the necessary clarity … the Commission would then need to do more to help investors distinguish brokers from advisors, dramatically improve its proposed disclosures, further minimize differences between the standard that applies to brokers’ recommendations and investment advisors’ advice, or some combination of the three,” the coalition wrote in its letter.

“A fundamental premise of the Commission’s proposed regulatory approach is that a summary disclosure document can be developed that will enable investors to better understand the differences between brokerage accounts and advisory accounts, including the standards of conduct that apply, and make an informed choice among the available accounts and services,” the group wrote.

“Until testing verifies that this is a reasonable assumption — including with regard to the least financially sophisticated investors most in need of enhanced protections — we cannot fairly evaluate that the Commission has deemed to be providing essentially the same service, investment advice, through different channels,” the group wrote.

The Consumer Federation of America (CFA), which also signed the letter, is concerned that previous testing of SEC disclosures have not proved effective in alerting investors to their financial professional’s conflicts of interests, compensation and standard-of-care requirements. “Getting the results of the disclosure testing before the end of the comment deadline is particularly important, given that past testing has shown how difficult it is to convey even the most basic concepts in a way that investors understand,” said Barbara Roper, the CFA’s director of Investor Protection.

Joining CFA, the CFP Board of Standards and AARP are the CFA Institute, National Association of Personal Financial Advisors (NAPFA), North American Securities Administrators Association (NASAA), Public Investors Arbitration Bar (PIABA) and 17 other consumer, public policy and legal advocacy groups on the letter asking SEC Chairman Clayton for the delay.

“Delaying the comment deadline would allow the SEC to receive fully informed comment on an issue of paramount importance to millions of working Americans and retirees,” Roper said.

To measure the proposed Form CRS’s effectiveness with investors, the group is asking the SEC to test:

• whether investors understand the differences between sales recommendations offered by brokers and the advice offered by investment advisors;
• whether investors understand what the requirement to act in the customer’s best interest means and how that differs from a fiduciary duty;
• whether they understand the implications of the fact that brokers do not typically have an ongoing duty of care;
• whether the information provided on costs and fees is meaningful;
• whether the discussion of conflicts of interests helps investors to understand how those conflicts might influence the recommendations or advice they receive; and
• when investors would need to receive the disclosures in order to incorporate them into their selection of providers.

“In short, information gained through testing will prove important to how we comment, not only upon specific aspects of the CRS, but upon the fundamental adequacy of Regulation BI. And until we know whether an effective disclosure document can be developed, any comment on the overall proposed regulatory approach will necessarily be merely speculative,” the group said.

The new request and testing itself is likely to prove challenging for the agency — not least of which because the SEC is giving broker-dealers creative license to create their own Form CRS disclosures, instead of requiring a standardized form.

At the Finra annual conference this week, Chairman Clayton asked firms to send the SEC samples of the Form CRS disclosures they’re creating.