SEC Faces Reg BI Tough Questions At House Committee Hearing

The Securities and Exchange Commission was accused of failing its mission as “Wall Street’s cop” in the first appearance of the full SEC board in Congress since 2007.

Financial Services Committee Chairwoman Maxine Waters made the accusation in her opening statement in Tuesday’s hearing, which quickly focused on the SEC’s Regulation Best Interest standard.

“Key rules, like the Volcker rule, have been rolled back, while rules to implement other important reforms on issues like executive compensation-- which Congress enacted back in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act-- remain incomplete.” Said Waters, D-Calif. “Other regulations, such as the SEC’s so-called Regulation Best Interest, fail to protect retirement savers from unscrupulous financial advisers.”

In June, Chairwoman Waters blocked funding for the SEC’s Regulation Best Interest with an amendment to the House appropriations bill.

Another Democratic representative agreed that Regulation Best Interest did not serve consumers well.

“I believe the rule was far too weak and did not raise the standard for brokers nearly enough,” said Rep.  Carolyn Maloney, D-N.Y.

Maloney called on Commissioner Robert J. Jackson, who dissented on the entire package of rules containing Reg BI to explain his vote. Jackson said that he hoped the Commission would take a clear stand to say that in a conflict, the investors’ interests must come first, calling Reg BI a “muddled standard that exposes millions of Americans to the costs of conflicted advice.”

When asked by Maloney what the SEC could do to rectify Reg BI, Jackson said the SEC can use the power authorized by Dodd-Frank.

“There is express authority under Section 913(g) that would allow us to set a uniform and strong standard with respect to investment advice in this country,” Jackson said.

Clayton rebutted Reg BI’s criticism in his opening remarks: “In June, the Commission adopted a long-overdue package of rules and interpretations to require candor and impose other responsibilities on investment advisors and broker-dealers and their dealings with our main street investors,” Clayton said. “As a result, for the first time, regardless of whether an investor chooses a broker-dealer or an investment advisor, the investor will be entitled to a recommendation that is in the investor’s best interest and does not place the interests of the firm or the financial professional ahead of the investors.”

In addition to highlighting the efforts of the Commission to have investor and professional input through seven roundtable events, Clayton testified on the challenges facing the SEC. Referring to the SEC’s IT and cyber initiatives, Clayton said, “substantial work remains,” emphasizing how key the funds from the appropriations bill are to the efforts of the SEC.

Commissioner Allison Lee, who began her tenure as Commissioner in July called for transparency and accountability in all of the issues currently being considered by the SEC, including the pursuit of a fiduciary standard.

“It is important for the SEC to be held accountable by the investing public, by those we regulate, and of course, by this Committee and by Congress,” Lee said. “Whether we’re making changes to staff’s long-standing review process for shareholder proposals, assessing the fiduciary duties of investment advisors with respect to proxy voting or considering how best to modernize and strengthen public company disclosures, we must be fair and transparent about the policy choices we make and the data on which we rely in making those choices.”

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.