New SEC rule aids and abets Wall Street predators
Tens of millions of Main Street Americans entrust the fate of their hard-earned money to brokers and other financial professionals, who usually call themselves “advisers,” trusting that they are going to act in their best interest.
After all, it’s their customers’ money. Shockingly, that’s simply not the law. Those advisers are legally permitted to put their interests ahead of their customers’ when giving investment advice.
The result is that Main Street savers and investors have been losing tens of billions of dollars a year to Wall Street brokers and other financial advisers who have conflicts of interest and put their own economic interests ahead of their customers’ best interest when recommending investments.
A straightforward fiduciary duty requiring those advisers to put their customers’ best interests first when giving investment advice would have eliminated this deeply unfair and damaging practice.
However, in the face of massive opposition from an industry seeking to continue to enrich itself at the expense of its customers, the Securities and Exchange Commission (SEC) rejected that strong, clear and simple standard.
Instead, it adopted a rule that preserves the status quo and protects the profits, business models and fee structures of the brokerage industry. Sadly, the SEC did so while claiming to do just the opposite, thereby misleading investors and enabling financial professionals to do the same, as Commissioner Robert Jackson said Wednesday in his dissent.
Instead we will see Main Street investors continue to suffer from the predatory conduct of so-called financial advisers with powerful conflicts of interest who will now be able to claim they are acting in their customers’ best interests.
Specifically, the SEC finalized what they’ve been calling “Regulation Best Interest” (Reg BI), along with a set of disclosure requirements (Form CRS) and new guidance explaining the scope of the fiduciary duty under the Investment Advisers Act.
The SEC stridently proclaims that these standards will better protect investors from advisers with conflicts of interest. The releases are lengthy and complex and will take some digesting, but it now appears clear that the SEC’s claims are simply false and that all three releases are indefensibly weak.
In fact, if the anti-fraud provisions in the securities laws applied to the SEC’s own bold and self-congratulatory claims about the rule, the agency would have something to answer for in court.
First, Reg BI itself does not actually require advisers to act in the best interest of their customers, instead essentially adopting the feeble “suitability” standard that has been on the books for years.
As to conflicts of interest, it imposes no duty on advisers to eliminate a broad range of powerful compensation incentives that will continue to corrupt advice, only prohibiting a narrow group of sales contests that are already largely prohibited under Financial Industry Regulatory Authority rules.
The SEC even scaled back the already tepid duty to “mitigate” conflicts of interest by narrowing the types of conflicts to which it applies.
By labeling and touting the rule as a “best interest standard,” the SEC is aiding and abetting brokers who will mislead countless investors into thinking they’re receiving protections the rule does not actually deliver.
Second, the accompanying Form CRS release was supposedly intended to provide investors with helpful information about the services that different types of advisers provide, the duties they owe and the compensation they receive. But the SEC has chosen to give advisers “flexibility” in how they present that critical information.
“Flexibility,” however, is little more than a license for firms to soothe and confuse investors with slick marketing materials, not simple, clear and uniform information investors can readily understand and use as they navigate the complex world of finance.
As noted by the SEC’s own Investor Advocate, these disclosures will just perpetuate investor confusion and fail to achieve the very goals SEC Chairman Jay Clayton set at the beginning of the process.
Third, the new guidance on the fiduciary duty applied to investment advisers under the Investment Advisers Act essentially abolishes what was once regarded as the gold standard for financial professionals.
It allows those advisers to satisfy what was a heightened duty simply by disclosing their conflicts of interest in a document that their customers are unlikely to understand even if they take the time to plow through the pile of legalese.
The related interpretation of the “solely incidental” exemption in the Investment Advisers Act will only cement the SEC’s long-standing refusal to enforce the law as Congress intended, thus ensuring that brokers who routinely dispense advice can nevertheless escape the Advisers Act requirements.
Perhaps the most fundamental flaw underlying all of these actions is the false notion that disclosure can adequately protect investors.
However, a mountain of evidence has demonstrated for years that disclosure alone cannot protect investors from conflicts of interest or other forms of financial abuse, any more than disclosure can protect Americans from contaminated pharmaceuticals, spoiled food on the grocery store shelf or toxic industrial waste poured into our local waterways. Only strong, enforceable standards of conduct will protect Americans from these threats.
Finally, throughout this rulemaking, the SEC has utterly failed to acknowledge the enormous costs imposed by adviser conflicts of interest on their customers and the terrible toll that such a weak rule will continue to take on tens of millions of Americans.
The economic analysis of investor harm in the proposal, issued in April of 2018, was so deficient that 11 former lead economists for the SEC actually took the unprecedented step of writing a letter to the agency highlighting the glaring deficiencies in the economic analysis.
The industry’s leading talking point in support of the proposal has always been that a strong investor protection rule would deprive investors of product choices and access to affordable investment advice.
But do investors really want the “choice” to be sold poor-performing, over-priced products that enrich brokers at investors’ expense? No one would knowingly choose to pay bloated fees, suffer inferior returns or assume excessive risk.
Moreover, even under a genuine “best interest” standard or a true fiduciary duty, investors would have plenty of choices about where to obtain investment advice and how to pay for it, and they would be receiving much better advice, not advice that benefits the brokers at investors’ expense. Yet the SEC fully embraced and repeated the industry’s bogus claims.
As the SEC celebrates the 85th year of its founding, it has failed miserably to fulfill its primary mission of protecting investors, which will be a stain on the agency’s reputation that will last for years to come.
Dennis M. Kelleher is president and CEO of Better Markets, and Stephen W. Hall is legal director and securities specialist at Better Markets.
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