More Conflict than Interest? How the SEC’s New Conflict-Of-Interest Rules May Mislead Retiring Investors.

By: Nathaniel Reiff

What may seem as a virtuous undertaking by the U.S. Securities Exchange Commission (“SEC”) to protect the nation’s aging population, is receiving a significant amount of backlash from some of the nation’s most influential advocacy groups.

In response to the outcry that profit-driven advice from financial advisers and brokers cause government officials and retail investors to lose as much as $17 billion a year,  the SEC adopted a new standard of conduct on Sept. 10, 2019 under the Securities Exchange Act of 1934 called the Regulation Best Interest (“RBI”). According to the SEC, the RBI “requires broker-dealers or a natural person who is an associated person of a broker or dealer . . . to act in the best interest of their retail customers when making a recommendation of any securities transaction or investment strategy involving securities without placing their financial or other interests ahead of the interests of the retail customer.” The RBI also mandates that registered investment advisers and broker-dealers provide their customers with disclosure forms explaining fees, costs, and potential conflicts of interest, to further enhance “the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers.”  The rule was ultimately adopted with America’s booming elderly population in mind, as retirees are now depending more on 401(k)s and IRAs for sustenance rather than mere pensions.

“By finalizing Reg BI and strengthening investor protections, the [SEC] will bring certainty to Main Street investors, working families saving and investing for a better future, and financial professionals across the country who do the right thing every day,” according to American Securities Association CEO Chris Iacovella.

However, many interest groups have questioned this idealistic rhetoric, claiming the RBI is not as protective for investors as boasted. For instance, following the RBI’s adoption, the nonprofit powerhouse for representing America’s 50-plus population, AARP, released an impassioned statement lambasting the rule as “mislabeled,” as it could “mislead investors into believing they are protected by a higher standard.” 

“The new rule does not strengthen investor protections, nor does it improve the quality of advice upon which investors rely,” proclaimed AARP executive vice president and chief advocacy and engagement officer Nancy LeaMond.

Barbara Roper, director of investor protection at the Consumer Federation of America, further builds upon this criticism by explaining that the SEC, “adopted a best interest standard in name only that will do nothing to change the way brokers evaluate and select investments to recommend but will mislead investors into expecting protections the rule does not deliver,”

Other criticisms levied against the RBI include that conflicts of interests can simply be satisfied by disclosures as well as that it just codifies existing obligations already featured in FINRA rules. Furthermore, a series of tests conducted by the AARP and the Consumer Federation of America, an association of more than 250 national, state and local consumer organizations, found that even with the provided disclosures mandated by the RBI, participants were still confused or did not fully understand the fees and costs, the impact of conflicts of interest, and when financial professionals were legally obligated to put their clients’ interests first. SEC Commissioner Robert Jackson Jr. has also vocalized his disillusionment to the rule, describing it as just policy choice wrapped in legalese, that displaces state fiduciary rules and could potentially instigate burdensome litigation.

While the RBI is still in its infancy, the SEC identifies in its released material that its Office of Compliance Inspections and Examinations (OCIE) will assist broker-dealers with implementing the new rules and address any questions they may have before the June 30, 2020 compliance date. Afterward, the OCIE will then assess the RBI’s “policies and procedures regarding conflicts disclosures, and for both broker-dealers and RIAs, the content and delivery of Form CRS.”

Although the newly enacted rule is riddled with its fair share of praise and countervailing criticism, it is undoubtedly an ambitious first step in unifying the rules and standards under which brokers and financial advisers operate in the United States.

Nathaniel Reiff is a third-year law student at Wake Forest University School of Law. He holds a Bachelor of Arts in Business Administration and a Master of International Business from the University of Florida. Upon graduation, he intends to practice corporate and insurance law.