SEC Commissioners Think Current Proposals Need Some Work

By Nevin Adams • April 19, 2018 • 0 Comments

Despite the 4-1 vote by the Securities and Exchange Commission to release for public comment its fiduciary proposals, the commissioners apparently (still) have issues with the current version.

In unveiling the package, SEC Commissioner Jay Clayton stated as motivations for this initiative:

  • investor confusion regarding the differences between broker-dealers and investment advisers;

  • a need for standards of conduct of conduct that meet reasonable investor expectations and adequately address conflicts of interest;

  • regulatory complexity resulting from the DOL rule;

  • reduction in broker-dealers’ service offerings; and

  • regulatory complexity more generally.

He then noted that he thought a “comprehensive package of rules and guidance” — not necessarily this first burst of proposals, but the final package — could raise and clarify the standards of conduct for broker-dealers and investment advisers, and provide clarity regarding fees, conflicts, and other “material matters.”

‘Unimaginative Paper-Based Default’

So, what did the commissioners who voted for (and against) the decision to release the proposals for public comment have to say about the proposals? Well, while broadly supportive of the decision, they all expressed reservations – and some serious reservations — about the current state of the proposal. For example, though supportive of publishing the proposals for public comment, Republican commissioner Hester Peirce expressed concerns “…that the approach we are taking will simply mean a few more pages of unread paper landing in investor trash cans.” She also took issue with the proposals “…unimaginative paper-based default,” and noted that “disclosure overload is also an issue for investors — a problem today’s proposed changes only exacerbate.

“Anyone who endeavors to read all the releases will be daunted by their collective heft. SEC printers are all crying out for new toner cartridges, and lugging our best interest binders around the halls has become a substitute for going to the SEC gym,” she remarked. All joking aside, Peirce cautioned that, “while the length of these releases provides lots of fodder for jokes, it’s a serious matter,” in that the length “makes it difficult for readers to understand what we are proposing, and thus harder for us to elicit comment on key points.”

Piwowar’s Perspective


Republican commissioner Michael Piwowar, a long-time critic of the Labor Department’s fiduciary rule (which he noted he had previously referred to as the “terrible, horrible, no good, very bad” rule), complimented the efforts of the SEC staff in developing the proposal, and then took a shot at the Labor Department’s rule, noting that “the only thing clear about that rule was that it would drive up compliance costs for broker-dealers and insurance providers to the point where many investors would be left without access to the affordable financial advice that these business models can offer.” He then gave a hat tip to the 5th Circuit for calling out “…the DOL’s highly questionable use of authority and vacated its rule,” noting that all eyes were now on the SEC “as we seek to provide a workable, non-political path forward.”

However, even while throwing his “overwhelming” support behind publishing the proposal, Piwowar acknowledged his “…misgivings about certain aspects of the nearly 1,000 page tome…” He noted that “the size of this package alone gives me pause. If it takes us that many pages to explain what we are trying to do, dare I say that our solution might necessarily lack the clarity that is needed to address retail investors’ confusion?” He explained that while he supported “…the spirit of today’s Form CRS proposal, it is evident that our relationship summary templates – as proposed — are in need of substantial public input.” How so? Piwowar said that the Flesch-Kincaid readability calculator indicated “they are about as comprehensible to the average reader as Herman Melville’s Moby Dick,” going on to note that that made sense, “…considering that the SEC staff who drafted them are securities lawyers and PhD economists.”

Piwowar also expressed doubts on the clarity of the line that the proposal reportedly drew between the Investment Adviser’s Act fiduciary standard and FINRA’s suitability standard.

Reluctant Support

While (“reluctantly”) voting to open the proposals for public comment, Democratic SEC Commissioner Robert Jackson Jr. also outlined several misgivings he has about the advice-standards package. In fact, he commented that “the problems with the proposals are too many to list,” directing his colleagues to the statement issued by his fellow Democratic commissioner. “I strongly support the Department of Labor’s rule because it protects investors from the very real costs of conflicted financial advice,” he said, “but without an Administration willing to enforce it or courts willing to take the realities American families face seriously, as we sit here today investors lack protections against so-called advisers who might endanger their financial future.”

Jackson went on to note that “the standard set forth in Regulation Best Interest is far too ambiguous” and is “muddled by confusing legalese.” He also expressed skepticism about the extent to which the rule “actually strengthens the so-called suitability standard that has for so long failed to protect investors from conflicted brokers” and took issue with the lack of economic analysis performed to consider the potential impact on investors, citing favorably the work that the Labor Department had done regarding the impact of the fiduciary rule.

Status Quo?

As for the single dissenting vote to publish for public comments, Democratic SEC commissioner Kara Stein pulled no punches, commenting that, “despite the hype, today’s proposals fail to provide comprehensive reform or adequately enhance existing rules. In fact, one might say, the Emperor has no clothes,” she wrote, going on to note that the proposals “essentially maintain the status quo.”

Stein expressed concerns that the SEC proposal “…merely reaffirms that broker-dealers have to meet their suitability obligations, requires some policies and procedures, and mandates a few disclosures,” and that “it protects the broker-dealer, not the customer.” She went on to state that “it would have been more accurate to call it “Regulation Status Quo.” Calling it Regulation Best Interest is not just confusing, it is in effect a form of mislabeling, which may be misleading and which could have deleterious consequences.”

“So what else could we have done?” she asked rhetorically. “We could have required broker-dealers to actually eliminate or mitigate conflicts of interest, instead of requiring broker-dealers to have reasonably designed policies and procedures. We could have required broker-dealers to provide ‘full and fair’ disclosure, instead of just ‘reasonable’ disclosure. Moreover, we could have made a few small tweaks to the current suitability standard, so that relief could be obtained for all investors when broker-dealer misconduct is widespread. In sum, we could have expected more from financial professionals who provide retail investors with investment advice.

“We are asking a retail investor to flip through four pages of boilerplate text, read through a series of questions, and then take the initiative to engage in a conversation with his or her financial professional about matters with which he or she may not be familiar. Why are we, in effect, placing the onus on a retail investor to cure his or her own confusion?”

Meanwhile, a good place to start in your own analysis is the Form CRS, or “Customer/Client Relationship Summary,” a point of emphasis by SEC Chairman Clayton, who acknowledged that “these paper mock-ups reflect a traditional approach to how firms could choose to communicate with retail investors.” The SEC said it recognized that the inclusion of graphic presentations can be more effective than text only presentations, and repeated that they are proposing to allow BDs and IAs to use electronic communications and graphics to meet their Form CRS obligations, “provided that such presentations are true to the content requirements and page limits of Form CRS.” Examples can be found below:

Form CRS Mock-up – Dual Registrant
Form CRS Mock-up – Standalone Broker-Dealer
Form CRS Mock-up – Standalone Investment Adviser





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