ARA Submits Comments to SEC on Proposed Regulation Best Interest and More

By Ted Godbout • August 03, 2018 • 0 Comments
The American Retirement Association has weighed in on the SEC’s Regulation Best Interest proposal.

Overall, the ARA’s Aug. 3 comment letter commends the commission’s efforts to tailor the proposed rules to “preserve investor choice with regard to business models and compensation practices in a manner that is workable for broker-dealers and investment advisers alike,” but does offer a number of recommendations. Heading the list of concerns, the ARA argues that net capital requirements are inappropriate for the advisory business, would be particularly burdensome to small advisory firms and should not be part of the agency’s final rulemaking.

The letter is in response to the SEC’s proposed Regulation Best Interest; Commission Interpretation Regarding Standard of Conduct for Investment Advisers; and Form CRS Relationship Summary released April 18.

No to Net Capital Requirements

Perhaps most critical, the ARA contends that the net capital requirements alluded to in the proposals are more appropriate for firms that hold assets and that sufficient investor protections are already in place to address perceived concerns over misappropriation and bankruptcy.

“An adviser is an agent of his or her client and does not maintain custody of client assets or put their own capital at risk,” the ARA explains. In contrast, it notes that broker-dealers (B-Ds) act on behalf of the firm as a principal and trade securities on their own account to help to create markets in securities. “It is the unique role of a B-D and the financial incentives at play that merit enhanced investor protections in the brokerage world (like net capital rules) that are not applicable in the RIA space,” the letter states.

The letter further contends that the problems of potential RIA misappropriation and bankruptcy are overstated. “The number of actions against RIAs is low and pales in comparison to the number of allegations brought against brokers through FINRA arbitration,” the ARA says. It further notes that in 2017, over 86% of all registered RIAs reported no disciplinary history at all and only 1% of all advisers reported that they or their affiliates had been charged with a felony.

Moreover, the ARA argues that net capital requirements would stifle small business and have an anti-competitive effect, explaining that such requirements are unduly burdensome to advisory firms, many of which are small businesses with the average SEC-registered RIA employing no more than nine professionals. “It would be imprudent to impose capital requirements on these small business just to capture a few bad actors — the means doesn’t justify the end,” the letter argues.

Retail Customers Should Include Non-Professional Fiduciaries of Small Plans

The ARA letter also recommends that the SEC clarify that non-professional fiduciaries of small employer-sponsored retirement plans are covered by the “retail customer” definition.

The organization suggests that the commission clarify Regulation Best Interest so as to avoid any “gap” in regulatory coverage, believing that it is paramount that financial professionals be held to a high standard of care when providing investment advice regarding retirement plan assets. “Simply put, broker-dealers should be held to the same standards of conduct when providing investment advice to a small retirement plan fiduciary as when providing advice to an individual plan participant or IRA holder,” the letter states.

Noting that B-Ds routinely advise the fiduciaries of small retirement plans concerning the investments made or made available to participants under such plans, the letter points out that fiduciaries of such plans may not have independent financial or investment expertise and therefore may rely on broker-dealers’ recommendations when making investment decisions on behalf of their plans.

In it proposed standard, the SEC explains that retirement plan participants and IRA holders are considered “retail customers” under the current definition because investment recommendations to such individuals would be used primarily for “personal, family, or household purposes.” While the ARA agrees with this analysis, it urges the SEC to clarify that the same analysis applies to a broker-dealer’s recommendations to a non-professional small plan fiduciary.

“In this respect, the Commission should clarify that small plan fiduciaries are the legal representatives of plan participants and that recommendations to such fiduciaries will be covered recommendations to retail customers within the meaning of Regulation Best Interest because those recommendations will ultimately be used by the plan participants for personal, family, or household purposes,” the letter states.

Disclosure Requirements

The ARA further recommends that compliance with the Department of Labor’s disclosure requirements should be deemed sufficient to satisfy Regulation Best Interest’s disclosure requirements where a B-D provides recommendations to small retirement plan fiduciaries.

The ARA explains that the Labor Department’s current disclosure requirements, such as the ERISA 408(b)(2) disclosures, Schedule C and Form 5500, overlap substantially with requirements proposed by the SEC. For example, the letter explains that the DOL’s 408(b)(2) regulation requires plan service providers, including broker-dealers, to provide a comprehensive set of disclosures to retirement plan fiduciaries sufficient to allow plan fiduciaries to assess the merits of the service arrangement.

As a result, the ARA believes that applying the Regulation Best Interest’s disclosure requirements where B-Ds make recommendations to small retirement plans would not have a positive effect and could even be harmful. “Adding a new disclosure for small retirement plan fiduciaries may cause them to feel even more overwhelmed and to disengage from the oversight process,” the letter states.

Other Recommendations

The ARA further contends that the proposed federal licensing regime would be “overly duplicative” of state efforts that require the Series 65 license. While advisers are not currently subject to licensing requirements akin to brokers under FINRA, they are subject to a higher standard of care at the federal level, the letter explains. It adds that the perceived gap between brokers and adviser is further diminished by the fact that most states have imposed registration, licensing, or qualification requirements on investment adviser representatives who have a place of business in the respective state (regardless of federal registration status).

Finally, while the ARA agrees with the SEC that an investment adviser can and should make personalized fee information available upon request, the organization believes a mandated periodic reporting requirement as proposed is unnecessary. The letter suggests that Form ADV and the proposed Form CRS each provide investors with sufficient information to understand the types of fees charged, the compensation conflicts that exist and whether further inquiry is necessary.

“The periodic provision of personalized fee statements (absent an investor request or inquiry) imposes an unnecessary and costly compliance burden on many investment advisers all the while threatening investors with disclosure fatigue – a counterproductive end,” the ARA concludes.




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