This article originally appeared on ADVISORHUB
Securities and Exchange Commission Chairman Gary Gensler’s reign has failed so far to realize the “investor-centric” expectations that they initially held for it, investor advocates said on Thursday.
“We had reason to be optimistic. Now, 13 months later, the picture is cloudier,” said Knut Rostad, co-founder and president of the non-profit advocacy organization, the Institute for the Fiduciary Standard.
Rostad spoke on a panel assembled to mark the second anniversary of the June 2020 initial compliance date of Regulation Best Interest, a rule aimed at reducing conflicts of interest of broker-dealers, registered investment advisors and dual registrants, and spawning more transparency.
The panel members expressed frustration with the SEC’s maiden enforcement action based on the regulation—a civil complaint filed June 16 against Western International Securities, Inc. and five of its brokers, alleging violations related to sales of risky, illiquid debt securities. The Western International brokers and the firm violated Reg BI standards by failing to perform adequate due diligence when they recommended and sold an unrated, high-risk investment known as L Bonds to retirees and other retail investors, according to the SEC’s complaint.
The lawsuit failed to focus enough on the brokers’ compensation or advance the definition of what is “Best Interest standard based on fiduciary principles for a broker-dealer in 2022,” Rostad said, expanding on comments by a plaintiff lawyer and law professor who were also on the panel.
“While we’re encouraged that the SEC has taken this action, we would have liked the SEC to go further addressing the inherent conflicts of interest related to brokers maximizing their own compensation at the expense of customers,” said August Iorio, a lawyer at New York’s Iorio Altamirano, who represents investors, and whose firm is investigating claims related to the L Bonds sold by Western International brokers.
The SEC’s claims “could have been made” under the prior Financial Industry Regulatory Authority’s suitability rule, the predecessor to Reg BI, which only required brokers to make sure their recommendations are suitable, given a client’s age, goals, and resources—rather than in their best interests.
Iorio said high-risk and high-commission debt products like the ones in the Western case have grown in popularity even in the Reg BI era. That echoed a point from state securities regulators who in November said that the regulation has produced no “tide-turning reforms.”
“The commission has the opportunity to make it clear that these sorts of recommendations are inconsistent with Reg BI,” Iorio said. “We hope that there’ll be much greater scrutiny with respect to these recommendations of high-commission and risky products, particularly when they’re sold to retirees.”
The SEC’s complaint against Western International “did not and does not really move the needle on what it actually means for a stockbroker to be acting in an investor’s best interest,” said Benjamin Edwards, a professor at the University of Nevada in Las Vegas’ William S. Boyd School of Law.
To be sure, the publicity around the litigation will still likely be favorable to investors, particularly because it could be tried in a courtroom rather than a Finra arbitration hearing, where outsiders can’t observe and, after which, no record, other than a final award, is made publicly available, Edwards said.
The SEC complaint was “a modest advance for investors in some ways,” but it “doesn’t push into any of that territory, theoretically outside the suitability rule,” or get at “precisely defining exactly where that boundary line is,” Edwards concluded.
Defining “best interest” is a “challenging” assignment for the SEC, Edwards conceded.
Rostad agreed. But the SEC has had two years to accomplish that task and has failed so far to do so, therefore June 30th will be “an unhappy birthday” for Reg BI, he said.
This article originally appeared on ADVISORHUB
