Major repairs to Reg BI, Form CRS and Adviser Act guidance are proposed to affirm broker and adviser differences and to level with investors

Knut A. Rostad, Ron Rhoades, Brian Hamburger *

Summary

The SEC June 2019 rulemaking on conduct standards is as significant as it is fundamentally misguided. The Institute for the Fiduciary Standard has identified five recommendations that would have a critical impact on raising standards to better serve and finally level with investors:

• Rebrand Reg BI as a ‘New Suitability’ standard for broker-dealers; affirm broker-dealer product recommendations are distinct from best-interest fiduciary advice;
• Strengthen broker-dealer ‘New Suitability’ standard by eliminating certain conflicts;
• Provide new guidance and clarity for the broker-dealer standard of conduct;
• Mandate disclosure in Form CRS to express the stark differences between fiduciary advice and product sales and test such language with consumers; exempt registrants if disclosure is also contained in other disclosure statements.
• For the Advisers Act, conflicts of interest that inherently violate the client’s best interest must be avoided; disclosure alone is insufficient. Further, strengthen the application of the Advisers Act’s fiduciary standard through guidance on state common law.

Introduction

The SEC’s rulemaking on Regulation Best Interest (Reg BI), Form CRS as well as its Interpretation Regarding Standard of Conduct for Investment Adviser, were finalized in June 2019. At the time, former SEC Chairman Jay Clayton stated that the rulemaking was needed to address:

• The “misalignment” between reasonable investor expectations and the actual standards; and
• Investor confusion over the differences between investment advisers and broker dealers.

We agree that rulemaking should address these issues. However, many of the 2019 Commission actions actually made matters worse. They increased investor confusion by widening the disparities between investor expectations and the actual standards of conduct. Hence, we propose that the Commission move swiftly to correct the prior rulemaking and interpretations. Doing so will provide significant, positive and immediate impacts on investor protection and capital formation. In addition, these changes will advance the emerging investment adviser profession.

Read the full paper by downloading it here.

Media Coverage

The media has covered the release and substance of this paper in the week following its release. Here are the links to the media reports:

• InvestmentNews (January 28, 2021)
• ThinkAdvisor (January 28, 2021)
• FA Magazine (January 28, 2021)
• WealthManagement (January 28, 2021)
• Citywire RIA (February 1, 2021)

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* Knut A Rostad is President of the Institute for the Fiduciary Standard. Ron A. Rhoades is Associate Professor of Finance, Western Kentucky University’s Gordon Ford College of Business. Brian Hamburger is President and CEO of MarketCounsel Consulting. Rhoades and Hamburger are advisors to the Institute.