Barron's (June 5, 2019) - The Securities and Exchange Commission is poised to vote on an overhaul of broker-conflict rules on Wednesday, and advocates say that’s bad news for investors.
The so-called Regulation Best Interest, or Reg BI, rule includes clauses that regulators believe would “establish a standard of conduct for broker-dealers” to disclose and reduce conflicts of interest.
The agency states in materials for the proposed rule: “Our goal in designing proposed Regulation Best Interest is to enhance investor protection, while preserving, to the extent possible, access and choice for investors who prefer the ‘pay as you go’ model for advice from broker-dealers, as well as preserve retail customer choice of the level and types of advice provided and the products available.”
Investor advocates, however, believe the rule is bad news in disguise.
“It’s being promoted as a big win for investors but instead will leave investors worse off,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “Regulation Best Interest will make it easier for brokers to advertise themselves and weaken protections that currently apply under state fiduciary standards.”
The rule, they point out, does not mandate the elimination of those conflicts and is not as effective as imposing a fiduciary obligation on brokers.
One clause calls for the elimination, mitigation, or disclosure of conflict without further outlining what kind of “mitigation” is acceptable, says Christine Lazaro, president of the Public Investors Arbitration Bar Association.
She adds that another clause leaves room for vague forms of disclosure to be provided at a time when it will no longer be helpful to investors making decisions.
“It’s little more than a smoke screen to hide what they are doing, which is putting investor interests second,” says Dennis Kelleher, CEO of Better Markets.
In the event that the rule is passed, advocates say investors should protect themselves and not rely on RegBI to protect their best interests.
Investors should find brokers who are committed to fiduciary standards—which require brokers to put their customers interests ahead of their own—and have business models that take seriously the obligation to avoid conflict, they advise.
The Labor Department under the previous administration passed rules in 2016 imposing a fiduciary obligation on brokers, but they were later struck down by a federal appeals court, leaving the decision up to states and individual brokers.
“A vast majority of advisors embrace a standard that is higher than mandated by law and those fiduciary standards will be even more important after [Reg BI] is passed,” says Roper.