The Securities and Exchange Commission’s Aug. 7 deadline for comments on its proposed Regulation Best Interest, Form CRS and standard of conduct has now passed. Let’s take a look at some highlights.
Overall, the agency received thousands of comment letters, which it has now organized by form letter category, including more than 2,000 that call for “closing the loophole” regarding so-called conflicted advice and more than 1,200 from “licensed financial professionals” who offer their support for the Regulation Best Interest over the Department of Labor’s recently vacated fiduciary rule.
Other industry groups, including the American Retirement Association, the U.S. Chamber of Commerce, the Investment Company Institute and the Securities Industry and Financial Markets Association, offered their support for the proposed regulation, albeit with specific recommendations to improve the rule.
Chamber of Commerce. Tom Quaadman, Executive Vice President with the Chamber of Commerce Center for Capital Markets Competitiveness, writes that, “Most fundamentally, the SEC should reconsider the distinctions regarding conflicts of interest: which conflicts are ‘material’ and which conflicts ‘arise from financial interests.’” He contends that the Commission has not provided sufficient guidance or clarity in the proposal regarding how broker-dealers should make these determinations and what steps they need to take to appropriately mitigate conflicts.
Quaadman also suggests that the SEC provide more clarity on its expectations on how they will apply the best interest standard when assessing costs of and remuneration for recommended investments and how broker-dealers can meet the commission’s expectations when they offer limited investment choices.
SIFMA. Similarly, SIFMA President and CEO Ken Bentsen states that the organization generally supports the proposals, but believes there are a number of areas that should be modified. This includes, among others, that the definition of “retail customer” should be modified to harmonize with FINRA’s definition. Bentsen contends that, as currently drafted, the proposed definition would present significant challenges for firms because it “would result in inconsistent and redundant compliance structures to address the different definitions of ‘retail customer.’”
Moreover, he writes that the proposed interpretation of “material conflicts of interest” should be refined to elicit meaningful disclosures. As currently drafted, the proposed interpretation could result in excessive disclosure that would overwhelm investors, SIFMA states. “We urge the SEC to adopt, instead, the well-established definition of materiality for purposes of the Exchange Act that was set forth by the U.S. Supreme Court in Basic v. Levinson, thereby making Reg BI consistent with the rest of the Exchange Act,” Bentsen states.
ICI. Investment Company Institute President and CEO Paul Schott Stevens addresses, among other things, how the recent activity at the state level has again “raised the specter of multiple and differing standards of conduct (or related disclosure requirements), which could result in inconsistent protections for investors and a patchwork of confusing and burdensome requirements for firms with business in multiple states.”
He urges the SEC to coordinate closely with the DOL so that DOL “explicitly recognizes” the SEC’s best interest standard of conduct in a new, streamlined prohibited transaction exemption for financial professionals that are subject to an SEC-standard of conduct. Moreover, the organization requests that the SEC in any final rule on Reg BI also explicitly affirm that the SEC standards of conduct would preempt any standards under state law that are inconsistent with SEC regulation.
Empower. Empower Retirement President Edmund Murphy applauds the SEC for apparently taking the DOL rule into consideration when developing the Reg BI because it appears to achieve many of the same goals as the DOL’s Best Interest Contract exemption (BIC), while avoiding many of its more burdensome aspects. He notes that when the DOL rule was finalized in 2016, retirement service providers committed significant resources in preparation for compliance.
“While the DOL rule was vacated by the United States Court of Appeals for the Fifth Circuit in March 2018, many service providers had already developed and put into place policies and procedures to comply with the impartial conduct standards during the interim period pending the rule’s final effective date of July 1, 2019,” Murphy writes. “By taking into consideration the key principles of the DOL rule and avoiding many of its more burdensome aspects, the SEC proposal would allow service providers to leverage those efforts.”
ARA. The American Retirement Association submitted its comment letter Aug. 3. It commended the commission’s efforts on the proposed rules, but made a number of recommendations on capitalization requirements, retail definitions and disclosure requirements.
Bay Staters. At the other end of the spectrum, as we previously reported, is Massachusetts Secretary of the Commonwealth William Galvin, who contends that the SEC has proposed a “weak and unclear standard” which, unless modified, will force the state to adopt its own rules to protect investors and require broker-dealers to provide non-conflicted advice in the best interest of their clients.
Galvin appears to align his comments with those of Massachusetts Sen. Elizabeth Warren (D), who criticizes the SEC proposal for not defining “best interest,” for requiring only that brokers mitigate and disclose conflicts of interest rather than eliminating them and for not providing a private right-of-action for investors to sue brokers who violate the best-interest rule in court.
The earliest we could see further action by the SEC probably won’t be until next year, perhaps in the spring, but even that’s an ambitious timetable. The commissioners and staff will have to review the various comments and decide on whether and how to incorporate the feedback into the proposed new standards. It’s possible the commission could incorporate some changes and ask for a second round of comments, or it could bypass that route and proceed to a final vote.
In addition, the commission is currently split 2-2 along political lines, following the departure of Republican Commissioner Michael Piwowar in July. The Senate Banking Committee on July 24 held a hearing for Republican nominee Elad Roisman, but he still needs to be confirmed by the Senate.
Additionally, it was reported earlier this week that President Trump may nominate former SEC enforcement lawyer Allison Lee to replace Democratic Commissioner Kara Stein, who must step down by the end of the year.