Financial Advisor (July 24, 2024) - By Evan Simonoff
With the Securities and Exchange Commission’s Regulation Best Interest turning five years old this summer, former SEC commissioner Robert Jackson and four other fiduciary advocates offered a range of critiques, some of them harsh, of the SEC’s implementation of the rule. The panelists described Reg BI as vague and muddled, called for more frequent SEC actions and said financial advisors should be required to document their recommendations, among other things.
Jackson, the lone opponent of Reg BI when it was enacted in June 2019, headlined a briefing today that included former assistant secretary of labor Phyllis Borzi, as well as Joseph Peiffer, the president of the Public Investors Advocate Bar Association PIABA, a trade group representing securities lawyers. Benjamin Schiffrin of Better Markets also participated, as did Knut Rostad of the Institute for the Fiduciary Standard, which sponsored the event. Reg BI was introduced by the Trump administration as a substitute for the Obama administration's DOL rule after that proposed regulation got shot down by the courts.
Jackson argued that the problems that existed before Reg BI went into effect “continue to plague” the industry. He described the standard as “so muddled” it remains virtually impossible for investors to determine what it means.
Although Reg BI says brokers and advisors are supposedly required to disclose conflicts of interest, “it doesn’t say what the conflicts are,” Jackson said. There is “no requirement to document why an investment is in the client’s best interest. That would go a long way.”
Technology, especially AI and gamification, are likely to accelerate the problem in the next five years. “Soon a machine will tell an investor to buy Apple options instead of Apple stock,” even though it’s much riskier and more expensive, he continued. “I’d like to see someone write down why.”
Another target of Jackson’s was leveraged exchange-traded funds. “They are very unlikely to serve a retiree’s best interest,” Jackson said.
Form CRS was supposed to correct many of the shortcomings of Reg BI but, in Jackson’s view, it came up short. He described himself as “devastated” when he received a form from his advisor. It disclosed “very little information” about how the advisor was paid and was generally lacking in much useful information at all.
Brokerages continue to fail when it comes to conflict of interest disclosure with complex products. A former Merrill Lynch broker, who wasn't at the event, notes that firms often are selling brokerage shares of alternative investment products when the advisory shares would be better and cheaper for the client.
Rumor has it, the panelists said, that some major SEC enforcement actions on Reg BI are coming. Peiffer said there have so far been less than 100 enforcement actions.
“It’s past time for the [Gary] Gensler SEC to bring some enforcement actions,” Jackson said. “The SEC has allowed the perfect to be the [enemy] of the good. [Chairman Gensler] should have focused on what he can do.”
Technology is an emerging threat to investors protection. Schiffrin pointed to digital engagement practices and the way the AI and gamification are being used in legalized sports gambling. When these technologies are applied to investing, "it could induce investors to keep trading" when it's not in their best interests.
Why, Jackson asked, are broker-dealer "apps recommending options? Make them justify it," he declared.
Peiffer noted that the gaps in Reg BI were “unfair to advisors who live up to their fiduciary duty and follow the rules.” They are forced to compete against less scrupulous advisors who sell products “that pay them more.”
Rostad began the event by questioning whether Reg BI did much more than simplify “codify” standards. He also quoted investor advocates who claimed Reg BI was designed “not to disrupt” traditional securities industry practices and added that the number of risky products actually increased when Reg BI went into effect.
Borzi said that most advisors "want to do the right thing" but people "do what they are paid to." She added that Reg BI gave the industry a "good structure" to redress some of the imbalances in the SEC-Finra relationship and added the new rules were narrowly written.
Several panelists said the Biden administration crafted their latest DOL fiduciary rule proposal to avert the Fifth Circuit Court's objection to the original 2016 rule. The Fifth Circuit Court is viewed as a favored venue of businesses seeking to overturn laws and goverment regulations. Borzi mentioned that she knew of a law student engaged in a research paper looking into the Fifth Circuit's inner working on the theory that there were so few judges in the Eastern and Northern districts that a plaintiff could practically select their favorite judge.