‘There’s More Work To Be Done:’ Reg BI Faces Criticism At Congressional Hearing

The Security and Exchange Commission’s Regulation Best Interest standard was able to find some agreement among representatives at a congressional committee hearing– the rule still needs work.

The partisan split appeared over the degree of change that Reg BI needs, with Republicans suggesting adjustments and Democrats demanding an overhaul, during a two-hour hearing on March 14 before the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Republican members of the Committee commended the SEC’s effort to establish a new standard in the wake of the vacated Department of Labor fiduciary rule. The fight continues over preserving the suitability standard or pushing it closer to a fiduciary standard.

Republicans focused on how Main Street investors would not be able to access financial advice if the rules changed for broker/dealers because commission-based models are the most likely to service middle-class Americans.

Rep. Ann Wagner, R-Mo., was a leading opponent of the DOL rule in the Republican-controlled Congress and said she would like to see a rule that preserves distribution.

“I applaud [SEC] Chairman [Jay] Clayton and look forward to a finalized SEC rule very soon that will create a best interest standard for broker/dealers that benefit the most vulnerable consumers and restores their choice and access to financial products at an affordable cost,” Wagner said.

Democratic members argued that the rule should more closely aligned the fiduciary standard and draw clear distinctions between product sellers and service providers.

The subcommittee’s chairwoman was adamant that the SEC rule is not even close to adequate. Rep. Carolyn Maloney, D-N.Y., said the commission was going against its own findings in a report required by the Dodd-Frank reform law.

“The SEC staff dutifully conducted a comprehensive study, and in 2011 they submitted a 208-page report recommending very explicitly that the SEC adopt a rule subjecting brokers who provide investing advice to retail customers to the same fiduciary duty as investment advisers,” Maloney said. “Unfortunately, despite the staff's recommendations, the SEC spent seven years dragging its feet, refusing to even propose a uniform fiduciary duty rule.”

Four of the five witnesses for “Putting Investors First? Examining the SEC’s Best Interest Rule” hearing agreed.

Barbara Roper of the Consumer Federation of America, a leading critic of Reg BI, laid into the rule once again, but offered a spot of “good news.”

“A rule that appeared at first glance to offer promise, is revealed to do little more than simply codify the existing requirements under FINRA suitability rules,” Roper said. “The good news is that it would still be possible for the commission to fix Reg BI and to do it without starting its regulatory process from scratch.”

Another panelist focused on quotas and bonuses, such as trips, that incentivize sales. Dina Isola, an investment advisor representative with Ritholtz Wealth Management, said she has seen the abuses in her career.

“Top selling brokers were rewarded with gifts and trips to exotic locations like Monte Carlo,” Isola said. “The brokerage business model is setup to pit broker against client. These incentives reward bad advice that harms investors.”

The other two panelists in some agreement were Susan MacMichael John, chair of the CFP board of standards and Lee Baker, president of AARP of Georgia.

The fifth witness was Harvey Pitt, who served as SEC chairman under George W. Bush and now heads consultant firm, Kalorama Partners, and who defended Reg BI.

“I think this is an important standard and it’s also a prudential standard, which will make it possible for the SEC to apply it broadly and to achieve its purposes, not in a narrow vein, which would be the result with a more prescriptive rule,” Pitt said in response to a question from Rep. Steve Stivers, R-Ohio.

According to the subcommittee, Reg BI would affect 2,800 brokerage firms, 7,000 investment advisory firms, 162 million customer accounts managed by brokers and advisers and $36.6 trillion in assets. Introduced on April 18, 2018, Reg BI aimed to change the current suitability standard of conduct for brokers.

Reg BI is in the final rulemaking stage with a final action expected in September 2019.

In its written statement to the subcommittee, the Insured Retirement Institute said it was happy with the proposed standard.

“Although IRI and our members believe that the vast majority of Broker-Dealers already act in their clients’ best interest and are intensely committed to helping their clients reach their retirement income objectives, we also understand that many consumers are dubious about seeking out assistance from financial professionals,” IRI wrote. “Therefore, we believe the SEC rule effectively establishes a baseline for all Broker-Dealers to adhere to and provides consumers confidence that their financial professional is working first and foremost on their behalf.”

Representative Bill Huizenga, R-Mich., said the proposal is not perfect, but should not be overhauled.

“Today’s hearing asks the question is the SEC’s Reg BI ‘putting investors first?’” Huizenga said. “The answer is a definite and resounding yes, with some refinement that needs to happen,”

 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.