CFA Institute says “Reg BI has fallen far short of the vision and expectations initially intended,” that “a formal and clear definition of ‘best interest’ . . . does not exist,” and that “Form CRS may well be the least effective form ever created by the [SEC].”
On April 14, 2021, CFA Institute submitted a comment letter to Allison Lee, Acting Chair of the Securities and Exchange Commission. CFA Institute spoke candidly about the ambiguity around the term “best interest,” the shortcomings of Regulation Best Interest, and the failures of Form CRS.
The Institute excerpts the Introduction and Observations and Recommendation that CFA Institute proposes “for Reg. BI 2.0” in the first two pages of their letter, below:
In short, Regulation Best Interest has fallen far short of the vision and expectations initially intended in the pursuit to mitigate mis-selling of financial products and services that has existed for many years and was magnified by the Great Financial Crisis. It has failed to deliver on the promise of bringing clarity and consistency to the standard of conduct of broker-dealer firms and their registered representatives when providing advice to retail investors. So too has Reg. BI failed to meet the Congressional mandate underthe Dodd-Frank Act.It was a financial crisis of different origins and nuances than our current predicament that gave rise to the regulatory effort to address mis-selling of financial products and services. Yet here we are more than a decade later having done little more than produce new labels for the same level of brokerage services and responsibilities.
As an organization of investment professionals committed to investor protection, CFA Institutehas long advocated for a fiduciary duty standard that would apply uniformly to all who provide personalized investment advice to retail investors. With this letter, we respectfully encourage the Commission take up a directed effort to elevate the inadequate improvements offered by Reg. BItomeaningful, investor-focused protections. We present below our summary observations and recommendations regarding Reg. BI and Form CRS Relationship Summary (“Form CRS”).
Observations and Recommendations for Reg. BI 2.0
Definition of Best Interest
- At his late date, a formal and clear definition of “best interest,” the hallmark of Reg. BI, does not exist. The Commission should adopt a definition to enhance investor protection.
- We understand many registered representatives are misusing the “I work in your best interest” mantra to suggest they are a fiduciary or a personal investment advisor of the customer.
- The books and records obligations and documentation required of various investment recommendations and how they meet the “best interest” of the customer area bit of a mystery. We are concerned that vague and variable recordkeeping practices across firms and registered representatives will lead to inconsistent and less diligent compliance behavior.
- Form CRS may well be the least effective form ever created by the Commission, in terms of matching stated objectives with the actual level of comprehension and helpfulness provided to retail investors.
- A clear explanation of the duties owed by a broker/salesperson to a brokerage customer is at best vague and likely ignored or not understood by potential customers.
- Form CRS does not specifically require what we consider to be an extremely important and necessary comparison of the duties the registered representative owes to others vs the customer. Of note is the duty the registered representative owes to the issuer of the securities being sold to the customer. In our view, this features as a primary and unacknowledged duty eclipsing customers’ best interests. This should be explained to the customer in Form CRS.
- The “agency issue” should be disclosed at the time of account initiation with a requirement for periodic reminders, which, as a practical matter, should occur as part of subsequent point-of-sale activities with the customer. This is the only means of transparency, clarity, and understandability of the inherent conflicts of interest that exist in the relationship.
- In the longer term, we would urge the Commission to embark on a holistic review and testing of customer relationship disclosures. Such a review should emphasize a layered approach, taking advantage of flexibility afforded by the customer relationship document, and, in contrast to the Adopting Release, consider requirements for “point-of-sale” disclosures of specific conflicts arising in the context of each particular transaction.
Read the full comment letter by CFA to the SEC.