The SEC Isn’t Giving Us Straight Talk

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If passed, the SEC’s 125,993-word proposed Reg Best Interest (“Reg BI”) will harm investors and greatly change the competitive landscape for brokers and advisors. The SEC’s four-page proposed disclosure (Form CRS) for advisors and brokers reveals much of what ails Reg BI. It also illuminates how the comments of Commissioners Peirce and Stein could be the basis for a bipartisan fix.

The SEC disclosure has been on a five-month tour gathering feedback from investors through a series of roundtable discussions. The tour has not gone well. Investors everywhere have booed it off the stage. Why?

The disclosure is incomprehensible.

This result was not preordained. The SEC is in a hole today 35 years in the making. Getting out won’t be easy, but the route is clear. Commissioners Hester Peirce, a Republican appointee, and Kara Stein, a Democratic appointee, have set a tone and offer bipartisan guidance.

“We’re going to keep working on it until we get it right,” SEC Chair Jay Clayton said about his proposals after the seventh SEC roundtable in Baltimore. Investment News reported the chairman’s chief takeaway from investors was, “Try to give us some straight talk.”

Straight talk would help. In fact, securities regulations were conceived by President Roosevelt as a code of ethics in 1933 that was, as he said, “simple enough for the public to understand.”

Broker and advisor roles were well understood for years, until the conflation of the two began. Law professor Arthur Laby recounts how broker-dealers (BDs) began shedding their stockbroker title in the early 1980s for various “trusted advisor” titles. Examples abound. One firm advertised, “total financial planning.”

A Consumer Federation of America paper last year showed how BDs tell investors they’re trusted advisors, and then tell the courts they’re just sales people. Brokers lead a double life.