The Sec’s Proposed “Regulation Best Interest” Won’t Protect Investors Says Sec Commissioner

On April 18, the Securities and Exchange Commission proposed a package of reforms intended to protect investors from broker-dealer conflicts of interest.  But the reforms won’t protect investors lamented SEC Commissioner Kara Stein at the SEC’s most recent open meeting: “one might say, the Emperor has no clothes.”  Among the reforms, proposed Regulation Best Interest disappointed her the most.

The SEC designed Regulation Best Interest to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making investment recommendations. To that end, the proposed regulation would hold brokers to a new “best interest” standard.  But as Stein pointed out, the proposed reforms don’t define the new standard.  Instead, they allow broker-dealers to satisfy their obligations to investors with esoteric disclosures and policies. So rather than protecting investors, Regulation Best Interest and the other reforms would provide broker-dealers with a road map around liability.  Or as Stein put it: proposed Regulation Best Interest fails to “provide comprehensive reform or adequately enhance existing rules.  Perhaps it would have been more accurate to call it ‘Regulation Status Quo.’”