Reg BI Readiness Questioned on All Fronts: SEC Commissioners, Trade Groups, Legislators

As to Nevada's fiduciary plan, Michael Pieciak, president of the North American Securities Administrators Association and the commissioner of the Vermont Department of Financial Regulation, told the Nevada Securities Division in an early March letter that Nevada's fiduciary rulemaking does not violate securities laws.

Nevada's draft regulations "should curb abusive sales practices in Nevada," Pieciak wrote. "The division will likely receive objections to the draft regulations from the securities industry; however, we must remember the securities industry has proven itself adaptive and can accommodate these new regulations."

In the field of securities law, Pieciak wrote, "state laws are pre-empted only to the extent they conflict with the federal securities laws."

Lawmakers Weigh In During a March 14 hearing on Reg BI, Rep. Carolyn Maloney, D-N.Y., who chairs the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, stated that "while the SEC's Reg BI may be an improvement on the status quo, it is still far too weak," and that she still has serious concerns with the rule.

The first fault Maloney sees is that Reg BI does not subject brokers to a "full fiduciary duty," like the Labor Department's now-defunct fiduciary rule would have required. "Instead, the SEC's rule says that brokers who provide advice to retail customers have to act in the 'best interest' of the customer — but refuses to define 'best interest.'"

Further, Maloney argued, "instead of saying that brokers have to provide advice 'without regard to' their own financial interests — which Dodd-Frank specifically required — the SEC's rule actually does allow brokers to take their own financial interests into account."

The Reg BI proposal also "relies far too much on disclosing conflicts of interest, rather than simply eliminating conflicts,'" Maloney stated, adding that the SEC must strengthen the rule.

Rep. Sean Casten, D-Ill., introduced draft legislation during the hearing to require the SEC to conduct usability testing on the agency's new disclosure forms before finalizing Reg BI, a plan that Maloney said "is an excellent idea."

Barbara Roper, director of Investor protection for the Consumer Federation of America, told me in separate comments on Casten's bill that the "SEC has known for years that the disclosures it relies on to inform investors are poorly understood by many if not most retail investors. Instead of acting to address that problem, it has continued to churn out the disclosures that suffer from all the shortcomings in content, wording and design. Form CRS is a prime example."

The Casten bill, Roper explained, "by requiring the SEC to incorporate qualitative testing earlier in the process of developing disclosures, offers an opportunity to finally and effectively address this problem. No one who cares about investors' ability to make informed decisions can reasonably oppose this bill."

The good news about Reg BI, however, Roper stated during her testimony is "that it is fixable. The commission didn't adopt the approach that we would have preferred — a uniform [fiduciary] rulemaking under Section 913" of Dodd-Frank, she continued, but "it is fixable."

The first step, Roper argued, is "making the best-interest standard meaningful — it has to require some kind of narrowing of the acceptable options beyond what currently satisfies" the Financial Industry Regulatory Authority suitability standard. Reg BI "currently doesn't do that." There's a footnote in the proposal that says Reg BI "simply codifies" FINRA's suitability standard on best interest.

"If you just say that brokers have to act in their customers' best interest but you leave in place all of the kind of toxic incentives … you are going to have, at best, just gross non-compliance with the rule," Roper said.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].