Thursday, April 16, 2020
As the weeks pass, we move steadily closer and closer to the June 30th implementation date for Regulation Best Interest. As I've written elsewhere, the new SEC rule does little actually help investors. The new rule package may also do real harm by collapsing distinctions between brokerage firms and independent registered investment advisers. In the headline quote for a new white paper from the Institute for the Fiduciary Standard, Professor Tamar Frankel explains how the new package erodes established fiduciary principles
Rostad and Fogarty tell the story that these standards deserve attention because they abandon decades of established principles. They then offer selected remedies to help investors manage in this new era. The Securities and Exchange Commission’s Regulation Best Interest ignores the brokers’ advisory sales-talk and waters-down significantly brokers’ fiduciary duties. In fact little remains. Hopefully, this rule will fail to achieve its purpose or is fixed before it brings true disasters on the securities markets. Otherwise, investors and the securities markets may pay the price.
As the SEC has altered investor protections, states have begun to put their own protections in place. Nevada stands alone with the first state fiduciary statute. New Jersey and Massachusetts also have proposed regulations.
Yet these regulations will not arrive before Regulation Best Interest goes into effect. At present, New Jersey has delayed its rule process. New Jersey's initial proposal broke with the SEC on an important point. It doesn't rely on disclosure to completely sanitize conflicts. Rather, the New Jersey proposal included a provision that "there is no presumption that disclosing a conflict of interest in and of itself will satisfy the duty of loyalty."
At present, I wouldn't expect the SEC to delay implementation of Regulation Best Interest. The brokerage industry isn't likely to seriously push for any delay because it would be like a child asking to delay Christmas. As Regulation Best Interest goes into effect, brokerages get the ability to market themselves as acting in their customers' best interests while still operating with the same conflicts. Be on the lookout for new advertising campaigns featuring "best interest" language. Few, if any, customers will actually read the fine print.
But financial adviser ads will continue to roll. With almost all other businesses shuttered and advertising prices plummeting, expect to see more ads from groups like the CFP board on television. After Regulation Best Interest goes into effect, they will all tell you that they'll act in your best interest. Sorting out what they actually will do once they have your money will be more of a challenge.