The SEC Investor Advisory Committee considered recent SEC proposals that would (i) set a best interest standard for broker-dealers that provide investment advice to retail clients and (ii) impose additional disclosure obligations on broker-dealers and investment advisers.

The Committee examined:

  • proposed Regulation Best Interest,
  • restrictions on the use of certain names and titles for broker-dealers and investment advisers,
  • the proposed short-form relationship summary disclosure requirement, and
  • additional disclosure requirements that would apply to municipal and corporate bonds.

SEC Chair Jay Clayton discussed several SEC initiatives aimed at bolstering protections for retail investors, including the creation of the Retail Strategy Task Force and the Cyber Unit (pursuing initial coin offering fraud), as well as the share class disclosure initiative. He reviewed existing market protections for retail investors, acknowledged that there is "room for improvement," and explained that the latest proposals would (i) set the standards of broker-dealer conduct to a "level investors would expect" and (ii) ensure that investors are fully aware of the details of their relationship with investment professionals, including relevant incentives at play and disciplinary history. He encouraged public comment on the proposals.

SEC Commissioner Kara Stein, who voted against proposing Regulation Best Interest, questioned whether the regulation would ensure that broker-dealers do not prioritize their own interests over those of their clients.

Commentary / Steven Lofchie

The SEC customer protection proposals are based on the well-intentioned and implicit assumption that if the requirements are adopted, broker-dealers will continue to offer the same customers the same variety and level of services at the same prices – and that the broker-dealers will do so in a way that provides additional protections and benefits to the customers.

What if that is not the case? What if, for example, (i) introducing brokers deregister to become investment advisers, (ii) fewer firms are willing to offer commission-only investment advice, or (iii) more customers are transferred to fees based on assets under management, which may, in many cases, be higher? If those events were to happen (and they do not seem improbable), the net effect of the best interest requirement might well be negative.

Accordingly, it should be incumbent upon the SEC to consider the potential negative consequences of the best interest requirement (for example, to consider how firms have already changed their business models in light of the DOL's Fiduciary Rule).

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