In a party line 3-1 vote on Reg BI the SEC proved once again that the Broker-Dealer industry has the best government money can buy. Champagne corks are popping up and down Wall Street. After all, intense industry lobbying and juicy political contributions paid off big time. They can continue to misrepresent their obligation to provide unbiased advice, call themselves fiduciary advisors when in fact they are commissioned sales people with embedded conflicts of interest, and further confuse retail clients by blurring the distinction between broker-dealer representatives and Registered Investment Advisors. It will be business as usual on Wall Street with hardly a missed beat. It does all this and more.
Hailed as a dramatic improvement over the old broker-dealer suitability standard, it really only further confuses the distinction between fiduciary standard and the reality of broker-dealer business practices. To be perfectly clear, in practice suitability meant that if a product wasn’t bad enough to gag a maggot, and no matter how high the commissions and costs, it would be suitable.
In theory Best Interest is a step up from suitability. Advisors are required to provide recommendations in the client’s Best Interest. And as if to illustrate how totally clueless they were, it took the SEC almost 800 pages to fail to even define what best interest might be. Note that they never mention the old standard for Registered Investment Advisors of Exclusive Best Interest.
But, here is where it gets even more tricky: When deciding if advice is in the Best Interest of the client Inevitable broker-dealer conflicts of interest may be either disclosed OR mitigated. Anyone that has tried to understand Amazon’s or Facebook’s privacy disclosure should understand how little light a properly designed disclosure can throw on a subject. It’s absurd to believe you can cure conflicts of interest by disclosure alone. Not in this universe anyway.
Worse yet, that same language may be interpreted to water down the well understood fiduciary standards that apply to Registered Investment Advisors. Previously, Registered Investment Advisors (Fiduciaries in every sense of the word) were required to disclose AND mitigate conflicts of interest. This language revision is celebrated by the SEC as a step toward reducing the differences between business practices of the two groups. In face, it’s a giant step backward in the regulation of Registered Investment Advisors.
In a strongly worded dissent, Commissioner Robert J. Jackson, Jr. stated:
“Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice. Even worse, contrary to what Americans have heard for a generation, the Commission today concludes that investment advisers are not true fiduciaries. Today’s actions fail to arm Americans with the tools they need to survive the Nation’s retirement crisis. Accordingly, I respectfully dissent.”
Institutions whose mission is truly promoting the best interest of investors are almost universally appalled. For instance, AARP sees the regulations as “Alarming” and continues: “Individuals saving for their retirement are more likely to be confused or misled and less likely to receive investment advice that puts their financial interests first. It is hard enough to prepare for retirement, and the new rule has only made it more difficult.”
Bottom line: Reg BI paints a gloss of respectability that obscures Wall Street’s intractable conflicts of interest, and further confuses investors who expect honest unbiased advice from stockbrokers and broker-dealer reps. In issuing Reg BI, the SEC has carefully painted lipstick on a pig.