In what is likely to be one of her last appearances as a Securities and Exchange Commission official, Commissioner Kara Stein argued that the agency must ensure that investment professionals are giving their clients unconflicted advice, suggesting that is not always the case.
Stein appeared Oct. 16 at the Brookings Institution in Washington, DC, where she contended that the various rules that apply to the many types of professionals offering investment advice are confusing both for the investors and for the investment professionals themselves.
Stein – who cast the single dissenting vote to publish the proposed Regulation Best Interest arguing that it maintains the status quo – is expected to step down later this year and likely won’t be with the Commission when it finalizes the proposal.
Investor Advice
In a recent survey conducted by the SEC in which respondents were asked what it means to “act in the best interests of the investor,” Stein explained that most respondents believed it meant they would be afforded a very high level of investment protection. What’s more, she noted that people who considered themselves “more experienced” investors believed that “best interest” implied an even higher level of protection than the average person.
To address this confusion, she sees at least two ways of going about this: either raise the duty for all investment professionals so that it meets investor expectations, or teach investors to treat the advice they receive from certain professionals differently.
One drawback, according to Stein, is that educating investors about complicated legal duties “is quite complicated in and of itself.” She suggested that it might be easier to simply require that all persons actually giving investment advice put their client’s interest first.
“The Commission must address the differing standards of conduct applicable to investment professionals and do so in a way that protects investors,” Stein stated. “This is our mission. This may require action from Congress, but the consequences are too large for us not to get this right.”
Educating Investors
Stein further suggested that investors should be able to easily compare financial products. To accomplish this, she pointed to tools used by online retailers allowing customers to easily compare similar products in a side-by-side format. “If we can compare toasters online, we should also be able to compare stocks, mutual funds, and other investments,” Stein contended.
Additionally, Stein asked, “Why shouldn’t periodic disclosures about the value of investors’ 401(k) accounts include how much income will likely be generated in retirement?” She suggested such a disclosure could be “like the box on the back of your credit card bill,” letting investors know if they are on track to meet their retirement goals.
Retirement Security Working Group
Stein also called on President Trump to issue an executive order creating a Working Group on Retirement Security that seeks private sector solutions and makes recommendations regarding legislative, regulatory or other changes. She suggested that such a working group should include regulators from the Departments of Labor, Treasury and Commerce, as well as the SEC and major market participants such as asset managers, exchanges, broker-dealers and others.
Stein’s five-year term expired in 2017, but commissioners may serve up to 18 months beyond the expiration of their terms. Earlier reports suggested that Trump administration officials were focusing on former SEC enforcement attorney Allison Lee to replace Stein, but so far a nominee has not yet been named.
In September, the swearing-in of Republican Commissioner Elad Roisman brought the SEC back to full capacity of three Republicans and two Democrats, but with Stein’s expected departure that situation looks to be temporary.
