The SEC has certainly made Reg BI sound like the regulation would solve all of the issues in the broker-dealer and investment advisory space.
The commission touted it as a substantial enhancement to the current suitability standards. The SEC claimed to address investor confusion over differences between brokers and investment advisors, aligning reality with client expectations. And, the SEC claimed to preserve investment choice.
So, if the SEC rule was the answer everyone sought, why are states moving forward with adopting their own standards of conduct for brokers?
The answer is pretty straightforward: The SEC rule fell far short of what it promised. To begin, the rule is premised on a flawed assumption — that clients are seeking choice in their relationship with their financial professional. The assumption is flawed because it assumes that investors are consciously choosing the type of professional with whom they do business. In reality, investors choose the person recommended by a friend or family member, or the person recommended to them in their local bank branch, or sometimes, the broker who cold-called the investor and seemed knowledgeable.
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Though designed to raise standards for broker-dealers, the SEC’s 564-page rule sent ripples throughout the advisory industry.
July 29 -
The chairman dismisses criticism as misguided, but leading investor advocates say he is misstating their views and glossing over real regulatory problems.
July 11 -
Think New Jersey’s proposed rule doesn’t apply to you? Think again.
June 24
Clients are not intentionally choosing to do business with a broker because they are looking for transactional advice or with an investment advisor because they are looking for more holistic investment advice. In fact,
Why do clients believe their brokers are trusted advisors, watching over them? Because for decades that is what the industry has told them. Investors did not create this mythology themselves, but rather, they have been conditioned to believe it is reality because the brokerage industry needs trust to exist. Who would turn their life savings over to a broker if they understood that broker was out to benefit the broker’s bottom line, not the interests of the client?
The SEC tried to convince the public that brokers have to act in a client’s best interest because brokers can no longer put their own interests ahead of the client. Just to take a step back, why were brokers ever permitted to put their own interests ahead of the client’s? Reg BI now says brokers may consider their own interests so long as they also consider clients’ interests. Said differently, the client’s interests and the broker’s interests can be tied, but still, the client does not win. Why not require a broker to put his client’s interests ahead of his own?
The SEC rule continues to ignore the reality that exists in the marketplace — brokers are seen by their clients as trusted advisors. Reg BI contains the brokers’ duties only to the time of the recommendation; ignoring the ongoing reliance a client has on a broker to monitor the account and investments. Reg BI disclaims any ongoing duty on the part of brokers, which means it moves further away from client expectations rather than aligning the duty with expectations.
Because Reg BI falls short on investor protection, several states are taking independent action. Nevada is considering what the scope of duties will be for brokers in its state after the legislature made brokers fiduciaries last year. New Jersey and Massachusetts have also started the process of adopting heightened standards for brokers.
The states that are moving forward recognize something the SEC has not — investors rely on the advice they are given by their financial professional regardless of whether the person is a broker or an investment advisor. The ongoing advice is what clients are primarily seeking, not the execution of trades. Investors should be protected when they trust an expert to manage their money. Their interests should not come behind, or even tie the brokers’ interests. They should come first. And the states should continue to move forward to do what the SEC did not — make this a reality.
