AGENCE FRANCE-PRESSE/GETTY IMAGES US Securities and Exchange Commissioner Kara Stein.
The SEC's proposed Regulation Best Interest ("RBI") is remarkable in how poorly it is crafted. Indeed, it is a disaster.
If passed in it's current form, RBI will:
- Not create a unified fiduciary standard as it was supposed to under the Dodd-Frank Act Section 913;
- Confuse clients as to the duties of broker-dealers compared to investment advisors, and;
- Pass off existing FINRA Rules and interpretations as some kind of heightened standard.
Table 1: Comparing SEC Regulation Best Interest to Existing FINRA Rules
For a PDF of this table click here.
As can be seen above, the only thing RBI adds are the disclosures relating to the scope and terms of the relationship and material conflicts of interest. While these are good additions, they fall far short of increasing investor protections.
Everything else in RBI already exists within the FINRA rules.
Kara M. Stein Comments
SEC Commissioner Kara M. Stein has savaged RBI in her public statement:
... does this proposal require financial professionals to put their customers' interest first, and fully and fairly disclose any conflicting interests? No. Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries? No. Does this proposal require financial professionals to provide retail customers with the best available options? No.
Commissioner Stein also points out, as have others, that nowhere in the 1,000+ pages of related documents does RBI define what "best interest" means. Instead, the RBI states the best interest obligation will be satisfied "if the broker-dealer complies with four component requirements: a Disclosure Obligation, a Care Obligation,and two Conflict of Interest Obligations." (96)
Thus, broker-dealers will be able to check the boxes to prove that they complied with an undefined "best interest" obligation that already exists under FINRA rules. This can only weaken investor protection.
To learn more about fiduciary expert Jack Duval, click here.