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17 State AGs Ding SEC Proposal

As the deadline closed, New York’s Attorney General filed comments with the Securities and Exchange Commission largely dismissive of the proposed Regulation Best Interest – and she’s done so with a coalition of 16 other Attorneys General.

Leaving little doubt as to their take of the proposal, the letter – signed by New York Attorney General Barbara D. Underwood, as well as the Attorneys General of California, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and the District of Columbia – early on refers to the SEC’s proposal as an “inadequate, watered-down standard of care,” and in its conclusion as an “insufficient step for investor protection.”

The letter notes that in the wake of the 2008 financial crisis, as part of the sweeping Dodd-Frank Act of 2010, Congress directed the SEC to study the effectiveness of existing regulations concerning the standards of care owed to retail investors. In 2011, the SEC study recommended a uniform fiduciary rule governing both broker-dealers and investment advisers, followed by the Labor Department’s 2016 fiduciary rule, which the AGs note “has since been overturned—with the Trump administration declining to further defend it—making independent SEC action all the more critical. Yet, the SEC’s Proposed Rule is inconsistent with its own study and the Congressional mandate to enhance protection for retail investors.”

 ‘Short’ Falls

The letter highlights what the signatories regard as four areas in which the proposal “falls short,” including:


  • Failure to establish a fiduciary standard (“…despite purporting to require that broker-dealers act in the best interest of their retail customers, the standard adopted by the SEC does not impose a fiduciary obligation to do so”).

  • Failure to adequately address conflicts (“the Proposed Rule fails to simply ban the most pernicious practices. In fact, the Proposed Rule recognizes and describes certain conflicted compensation incentives that may not be readily mitigated”).

  • Too heavily focused on disclosures (“…while comprehensive disclosure is a key element of effective investor protection, it is no panacea”).

  • Contains “key ambiguities” that may make enforcement difficult (“These key undefined terms include …conduct that constitutes acting in a customer’s “best interests”, a test for when a “recommendation” is made and the provisions of Regulation BI are triggered, “conflict of interest standards and the types of conflicted transactions that could be considered for mitigation or elimination”, and standards for permissible disclosures as to fees and charges, type and scope of services, and material conflict of interest”).


Recommendations

In light of those identified shortcomings, the 17 AGs do have some recommendations:


  • The SEC should adopt a fiduciary standard.

  • The SEC should adopt stronger protections against conflicts of interest and require the elimination of certain conflicts (here “sales contests” stand out in the comments).

  • The SEC should improve select disclosure mandates.

  • The SEC should ensure that any regulation is clear.

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