Swipe left on the SEC's investor-protection rule

Swipe left on the SEC's investor-protection rule
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It sure feels like we have been on a very bad online date. Everything looked good on the web, we had similar likes and dislikes, and we shared a passion for fixing conflicts and mis-selling that occurs regularly with financial service products. How do we love thee Regulation Best Interest (BI)? Let us count the ways.  

The big Securities and Exchange Commission (SEC) reveal this week, after months of courtship with investor protection enthusiasts was, as far as we can tell, a monumental bust.

CFA Institute has worked alongside other investor protection advocates to reduce costs, curb inappropriate and conflicted advice and end the general culture of taking advantage of individuals with low financial literacy. 


Unfortunately, our much-anticipated Regulation BI relationship turned out to be a toad and as shallow as the puddle it came from. Particularly when it is viewed in the context of how less-savvy retirement savers and retail investors will be negatively impacted.  

After showing early promise to fix industry self-interest, Regulation BI has turned into a symbolic gesture by the Securities and Exchange Commission.

There are some positive glimmers here and there on sales practices, but despite repeated trips to the SEC by many groups seeking honest reform of the sales culture, the needle has barely moved. 

Even with extensive market testing of retail investor comprehension that failed miserably and the negative views of generations of former SEC regulators and chief economists, the commission whiffed on both substance and effect. 

Specifically, a broker can now give essentially unlimited personal advice, still misuse the title “financial advisor” to confuse customers into thinking they are a fiduciaries and sell high-cost, low-performing proprietary products — just as long as they tell the customer up front what they are getting. 

Put differently, as long as I tell you Mr. and Mrs 401(k) that I have conflicts and that I am a sales person and can act in my firm's interest and not yours, then I can (and will) take advantage of your lack of knowledge. That is a toad if ever there was one.        


To put a finer point on this, the fact that a broker can simply disclose in a lengthy, convoluted and legalistic document called the Customer Relationship Statement (CRS) that he or she is a self-interested sales person but meanwhile offer that they are operating under a best interests standard is an astounding feat of rebranding.

It's the same old broker advice and relationship, we just make it sound more altruistic and customer focused. It is a prime example of taking advantage of consumer inexperience and widespread financial illiteracy. 

It is not a good day for our primary securities regulator or investor protection if the fine-print details of Regulation Best Interest confirm what we expect.  Our online heartthrob has turned out to be dreadful, and the once-in-generation opportunity to aid consumers and financial market integrity has eluded us once again.

Kurt Schacht is the managing director of standards & advocacy at the CFA Institute.