Now that the SEC is back with a full complement of commissioners, the regulator could move quickly to finalize the revisions to its
Republican Elad Roisman
"The confirmation of Commissioner Roisman definitely opens up the possibility for the rule to move forward more quickly," says Barbara Roper, director of investor protection at the Consumer Federation of America, a group that has been calling on the SEC to strengthen its rule. "As long as the commission was split 2-2, Chairman Clayton would have had to reach out for Democratic support to finalize a rule, and he doesn't seem to be inclined to do that."
A spokeswoman for the SEC declined to comment for this article, but Clayton has reiterated his view that the best interest rule for brokers and a new disclosure regime for advisors are crucial investor protections. The proposal has also drawn support from several industry groups that have long called for a new standard of conduct for brokers, but chafed at the now-defunct fiduciary framework advanced by the Department of Labor.
SIFMA, for instance, hailed the SEC's proposal for striking a balance that could protect investors without unduly harming the brokerage firms it represents.
"We commend the SEC for proposing a new best interest standard that would protect retail investors while preserving retail investor choice," SIFMA President and CEO Kenneth Bentsen said in a statement last month when the group submitted its comments on the proposal to the SEC.
Bentsen called for the commission to move swiftly toward a final rule, but his group is seeking some tweaks to the proposal that run counter to the efforts of the investor advocates. In its letter, for instance, SIFMA asks the SEC to allow brokers to satisfy their responsibilities on financial conflicts of interest through disclosure, rather than mandating that they mitigate or eliminate their conflicts.
Clashes over the Labor Department's fiduciary rule have carried over into the debate on the SEC's proposed regulation.
The commission staff has a voluminous record of comments to sift through, but observers expect that Clayton could move fairly quickly to bring the proposal to a final vote now that all five commissioner slots are filled.
"I think it makes a huge difference by bringing on a new commissioner," says Duane Thompson, senior policy analyst at fi360, a fiduciary training firm and consultancy. "Because you could have easily had ... a potential deadlock on a major rule like Regulation Best Interest."
Reg BI would require brokers to consistently make recommendations and provide advice that serves their clients' interests, and sets new guidelines for mitigating and disclosing conflicts. The Form CRS would require firms to make upfront disclosures of key assets of the advisory relationship, such as fees, compensation and potential conflicts of interest.
It remains to be seen how much the commission will revise key provisions of its rule package, but consumer advocates like Roper — who call for stronger rules for brokers and more simplified disclosures — are not optimistic.
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"I'm not expecting much in the way of meaningful changes to the rule, certainly not to strengthen investor protections," she says. "If Chairman Clayton is going to push this through on a partisan vote — and the signs are that he is — that means the rule is more likely to get worse before it is finalized, rather than better."
The Consumer Federation of America joined with the Financial Planning Coalition and the AARP to commission research into the potential impact of the SEC's proposal, concluding that the new disclosures envisioned in the proposed customer relationship summary document, or Form CRS, would only increase investor confusion. The study those groups commissioned involved 90-minute interviews with a handful of consumers in three U.S. cities, probing how well they understood the disclosures that dually registered firms would offer on their Form CRS.
In that test, consumers were confused about the different legal standards under which brokers and advisors operate, and some concluded that the "best interest" standard was a higher bar than advisors' fiduciary duty, a term that participants in the research were unclear on. Participants were also confused about brokers' and advisors' fees, compensation models and conflicts of interest.
The groups are submitting the results of their test to the SEC and calling on the agency to revamp Form CRS ahead of the final rulemaking.
Thompson credits the commission for conducting a thorough review of the comments it collects in all of its rulemaking proceedings, and suggests that the final rule could incorporate some of the clarifications that the consumer groups are seeking in Form CRS to put it into "plainer English."
But the larger issue — the best interest standard for brokers — isn't likely to see the kind of major overhaul that would amount to a meaningful advance over the current suitability standard for brokers.
"I think the elephant in the living room isn't Form CRS — it's Regulation Best Interest," Thompson says. "I could see more changes to the form CRS proposal than you would see in terms of substantive changes to regulation best interest."
Under law, when federal agencies make substantial changes to proposed regulations, they are supposed to formally re-propose the rule and collect a new round of public comments. But changes to the language of Form CRS would not likely meet that threshold, and Roper and Thompson both anticipate that the SEC could approve a final rule early next year.
"I don't see much willingness to take the time to fix it and test it and make sure that it works," Roper says. "I expect cosmetic fixes at best there. We may even get the worst of all worlds — greater freedom for firms to develop their own disclosures, which is a recipe for disaster."
