Attorneys General Urge SEC to Strengthen Proposed Regulation Best Interest

A coalition of 17 Attorneys General (“AGs”) urged the SEC to bolster the requirements set out in proposed Regulation Best Interest (the “Proposed Rule”).

In a comment letter to the SEC, the AGs criticized the Proposed Rule, asserting that it (i) sets out a weak “best interest” standard that falls short of a uniform fiduciary standard and fails to require broker-dealers to act as fiduciaries for their clients; (ii) fails to sufficiently resolve broker-dealer conflicts of interest by turning a blind eye to harmful practices and erroneously relying on the “good faith of broker-dealers to fashion effective policies”; (iii) relies too heavily on disclosures, which alone are not effectual in protecting investors; and (iv) is fraught with ambiguities, leaving key terms undefined and causing confusion for regulators and investors.

The AGs recommended the following:

  • the Proposed Rule should be altered to impose a uniform fiduciary standard on broker-dealers and investment advisers;
  • the SEC should enhance certain disclosure requirements;
  • protections against conflicts of interest should be adopted; and
  • the SEC should ensure that all key terms and provisions are clearly defined.

Lofchie Comment: It is a safe bet that any time a regulatory advocate describes its recommendations as being “common sense,” they are not. According to the state attorneys general, imposing additional burdens on broker-dealers can be done “without compromising investor access to financial professionals, the availability of diverse financial products, or choice in fee arrangements.” That seems a remarkable conclusion: how can it possibly be that one can impose material additional requirements as to the provision of a service, and yet there is no effect on the availability or cost of that service? If it is so obvious that this can be accomplished as to securities transactions, then surely the NYC subway service can be similarly enhanced without any increase in cost or other ill effect.

There are certainly arguments that can be made in favor of Regulation Best Interest. A reasonable starting point should be to ask whether the regulation is worth the increased costs and the diminished availability of certain services. This requires advocates of the proposed regulation to be at least willing to concede the existence of trade-offs, and (even better) to attempt to quantify them to the extent possible. If there are no trade-offs, and if everything is free, a subway train should have already arrived at the station.

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