Advisors, don’t hold your breath. Despite widespread criticism from basically every side of the equation, it appears unlikely the SEC is going to do much to correct the major flaws in its current Best Interest Rule. Barbara Roper of the CFA, says that she is “not at all confident” the SEC will make any meaningful changes to the rule “to better protect investors”, pointing out that the SEC had every chance to improve on the DOL rule, but didn’t. “It’s hard to believe that they are going to have a sudden conversion and fix the problems now”, she says.
FINSUM: Brokers, consumer protection groups, and clients all hate this rule (and don’t understand it), and it doesn’t make sense to anybody. Hopefully Roper is wrong and they will change the rule, but we worry they may not.
The SEC’s best interest rule has been giving brokers headaches almost since the demise of the DOL rule. Many groups have commented on the rule’s failing, including its governance on the use of titles and its deeply confusing attempt at delineating between brokers and advisors. However, one of those gripes now seems to have played out in practice, as early results from the SEC’s testing of its Customer Relationship Summary form (CRS) has essentially failed. According to the chief of the firm hired to do the study for the SEC, “Overall, participants had difficulty throughout the proposed CRS with sorting out the similarities and differences between the broker/dealer services and investment advisor services, and integrating this information across sections”.
FINSUM: This supports exactly what everyone in the industry has been saying—the rule is totally confusing and does nothing to help consumers. The SEC is going to have to do a major rewrite.
New academic analysis has found part of the full cost of the DOL rule on the financial sector. A group of academics analyzed the market cap movements of the top 30 brokerage and fund providers and found that, in aggregate, the DOL rule cost firms $14 bn of market cap. That figure does not include the money spent to prepare for the rule, just changes in share valuation that directly resulted form the rule. However, the same firms have since benefitted strongly from the so-called Trump Effect.
FINSUM: The DOL rule ended up being an enormous waste of time that in hindsight appears to have been doomed from the beginning. We will say that its lasting effect was to bring consciousness of fiduciary duty to the wider public.
Any advisor will know that the SEC’s new Regulation Best Interest has been under serious fire for the last couple of months. While it initially had a relatively warm reception from industry, brokers have railed against it more recently. Now, state attorney generals are mounting a furious push. The AGs of 17 states have come together to denounce the rule and demand a revision that mirrors the standard laid out in the old DOL rule. Specifically, the groups wants Reg BI to hold broker-dealers to the same standard as RIAs.
FINSUM: The SEC probably won’t do anything about this now, but this sets the stage for a major legal challenge before the rule may actually be implemented.
Okay, here is an honest question for our readers that we are debating internally. Did the DOL rule face more criticism, or is the SEC’s Best Interest rule taking more heat? While it initially seemed that only investor protection groups disliked the SEC’s Regulation BI, coalitions of brokers are now railing against it too. Amazingly, both brokers and investor protection groups agree—the SEC’s rule is too vague and confusing. Brokers say the rule is so vague they don’t even know how to comply, while investor groups say it is so weak it won’t change current practices (these are effectively the same argument!). “This will only serve to harm the brokerage model and limit choice for those investors who prefer the brokerage advice model”, says a broker group.
FINSUM: Honestly, we think the current iteration of the SEC rule is all but dead. The comment window closed yesterday, and we expect a serious redraft.