Financial Advisor (June 4, 2019) - The Securities and Exchange Commission is just 24 hours away from a historic vote to finalize its long-awaited plan for overhauling broker conflict-of-interest rules, but veteran consumer advocates and plaintiff attorney groups are already forecasting a “very short shelf life” for the controversial rule.

The prediction was made by a panel of policy experts and attorneys from the Consumer Federation of America (CFA), the Public Investors Arbitration Bar association (PIABA) and nonprofit Better Markets, at a press conference held today. The groups voiced allegations that the SEC’s long-awaited “Reg BI,” or Regulation Best Interest regulation, ordered by Congress more than a decade ago to protect investors from broker abuse, does more to protect the broker-dealer industry than investors and even rolls back existing consumer protections.

The SEC is expected to approve the plan tomorrow.

“This will make it easier for brokers to market themselves as trusted advisors,” said Barb Roper, the CFA’s director of investor protection, at the press event.

The SEC rule will also weaken advisors’ long-standing fiduciary standard by allowing them to rely on disclosure alone to “mitigate” conflicts of interests, Roper said.

PIABA President Christine Lazaro said the agency has a chance to protect investors “but instead it looks like the SEC will do what’s best for firms and continue to mislead investors into believing this rule will give them a higher standard of protection when, in fact, the opposite is true.”

“The truth,” Lazaro added, “is that it is actually a step backwards: It will leave investors with fewer protections in important areas than they would have if the commission had not acted. The message to investors is: You’re going to have to protect yourself.”

All three members of the panel told Financial Advisor that they expect the rule to be overturned by the next Democratic president and SEC chairman and believe the regulation will be challenged in court, although no plaintiff groups have yet stepped forward.

The panel members said that not only has the SEC overreached its authority by rolling back fiduciary standards mandated by Congress, but that the legal basis for overturning the rule includes the unprecedented letter by a group of 11 former SEC economists who wrote SEC Chairman Jay Clayton to fault the proposal for  “weak and incomplete” economic analysis.”

The economists wrote on February 6, “We find it worrisome that the proposal’s economic analysis does not fully consider some potentially important dimensions of the retail client-adviser relationship.” 

“It is a sad day in America when the agency that exists to protect investors decides instead to protect industry profits above investors’ best interests,” said Dennis Kelleher, president and CEO of Better Markets, at the press conference.

The PIABA and CFA noted these key deficiencies in Reg BI:

  • The standard will not actually require brokers to act in their customers’ best interest;
  • The standard will not prevent brokers from placing their own interests ahead of customers’ interests. Brokers will continue to be permitted to have conflicts that threaten their ability to act in a customer’s best interests.
  • The standard will apply on a transaction-by-transaction basis regardless of the nature of the relationship between the broker and customer. Brokers will not be required to monitor customer accounts to ensure investments remain on track, something that most investors reasonably expect their brokers to be doing. 
  • In a weakening of investment advisor fiduciary standards, advisors will be able to satisfy the standard through disclosure alone, allowing them to place their interests ahead of their clients’ interests.
  • The disclosures will be confusing and will not help investors make informed decisions.

Roper said, “Congress gave the SEC all the authority it needs to adopt a strong, pro-investor standard for brokers and advisors, and [Clayton] made a deliberate choice not to use that authority.” She added that Clayton refused to acknowledge his broad authority or the need for greater investor protections during meetings with the consumer advocate.

CFA is creating a campaign and tools to help investors continue to protect themselves, Roper said.