En español | A new regulation the Securities and Exchange Commission (SEC) issued Wednesday would fail to protect consumers from investment advice that is not solely in their best interest, consumer advocates say.
Amid growing concern from advocacy groups, government officials and others that retail investors lose as much as $17 billion annually due to profit-driven advice from financial advisers and brokers, the commission made a proposal last year to address such criticisms. These losses are particularly troubling as more Americans are relying on 401(k)s and IRAs rather than pensions to fund their retirement. At a meeting Wednesday in Washington, D.C., the SEC voted 3-1 to approve its “Regulation Best Interest” proposal.
In his remarks ahead of the vote, SEC Chairman Jay Clayton said the regulation will raise the standard of conduct for broker-dealers, requiring them to “act in the best interest of their retail customers when making a recommendation.” The regulation also would require registered investment advisers and broker-dealers to give customers disclosure forms that have information about fees, costs and potential conflicts of interest.
But AARP and other advocacy groups contend that the final regulation falls short of its stated goal of helping everyday investors better understand when financial professionals have to put their clients’ financial goals first. Many of these critics have pointed out that the regulation actually might confuse investors about what standards to expect from financial professionals. In the year since the SEC asked for public feedback on its Regulation Best Interest proposal, it received more than 10,000 comments. The SEC is the independent federal agency responsible for protecting investors and regulating financial markets.
"AARP is alarmed by the outcome of SEC's rule-making today on the standard of conduct for financial professionals,” said Nancy LeaMond, AARP's executive vice president and chief advocacy and engagement officer. “To make matters worse, the SEC has maintained the now misnamed ‘best interest’ label, which AARP's consumer testing revealed may mislead investors into believing they are protected by a higher standard. Continuing to mislabel this new rule as a ‘best interest’ standard risks continuing to confuse and mislead consumers.”
This lack of clarity on the definition of best interest has been a consistent criticism of the SEC's new regulation. In remarks before his vote against the rule Wednesday, SEC Commissioner Robert Jackson Jr. said it “fails to require that investor interests come first."
"Instead, the core standard of conduct set forth in Regulation Best Interest remains far too ambiguous about a question on which there should be no confusion,” Jackson said. “As a result, conflicts will continue to taint the advice American investors receive from brokers."
Consumer research also has found that the disclosures that were a central piece of the SEC's proposed rule could be difficult for retail investors to understand well enough to make informed decisions. Last August, AARP partnered with the Consumer Federation of America — an association of more than 250 national, state and local consumer organizations founded in 1968 — to test whether everyday investors in three cities could understand the disclosure materials financial professionals would give clients under the proposed regulation. The tests found that most users still were confused about fees and costs, didn't fully understand the impact of conflicts of interest, and also did not understand when financial professionals were legally obligated to put their clients’ interests first. The disclosure guidance the SEC approved Wednesday includes revisions that the commission says would give financial firms more flexibility to describe their fees and services.
Broker-dealers must comply with the Regulation Best Interest by June 30, 2020. The SEC did not release the final package to the public prior to Wednesday's vote, and consumer advocates are just now reviewing the package with plans to offer guidance to investors about what they should expect from financial professionals.
"This rule will have a negative impact on the ability of Americans to save and invest for retirement, and we intend to immediately educate our members about its harmful changes,” said LeaMond. “It is hard enough to save for retirement, and we should do all we can to make sure retirement savers are getting the advice they need. Unfortunately, this new rule fails to put investors’ interests first, and AARP stands prepared to continue to fight to protect Americans’ hard-earned savings."