The Securities and Exchange Commission is nearing completion of its proposed Regulation Best Interest, a new rule governing the conduct of broker-dealers when providing recommendations about securities to retail consumers. It represents a sensible, principles-based approach to protecting consumers in financial transactions.
Not surprisingly, Reg BI has its share of critics, most notably a handful of state securities regulators, who say it does not go far enough. They point to their own states’ proposals, which emulate the judicially vacated Department of Labor’s fiduciary regulation, as better models. While well intended, their preferred approach would not be in consumers’ best interest.
First, there’s the issue of uniformity. Individual states developing their own rules would result in a patchwork system of regulation that provides uneven consumer protections. Consumers in one state should not have lesser protections than consumers in another state. This is a national issue that calls for a national solution.
The critics are also wrong about the Department of Labor’s fiduciary regulation. Rather than protecting consumers it would have provoked a detrimental advice gap for small and moderate retirement savers. According to a survey by the market research firm LIMRA, if the fiduciary regulation had remained in-force, 54 percent of advisers might have dropped or turned away small investors, resulting in as many as 4 million middle-class households losing access to information they need to ensure a secure retirement.
We saw this scenario begin to unfold during the regulation’s brief existence. Many financial firms moved to a fee-for-service-only model, no longer working with consumers with account balances of less than $250,000. The regulation eliminated choice and access, unfairly treating small and moderate-balance savers and typical buy-and-hold investors who rely on commission-based services for their retirement needs.
It especially hurt middle-income consumers who rely on annuities to provide a guaranteed stream of lifetime income in retirement. Most annuities are sold on a commission basis. According to the latest available data, the median annual household income of annuity owners is $64,000. Eighty percent have total annual incomes below $100,000, and more than a third (35 percent) have household incomes less than $50,000.
In contrast, the SEC’s Reg BI offers a national solution so its protections would apply to all consumers, regardless of where they live. Reg BI raises the bar on existing consumer protections while preserving consumer choice and access to products and services they want and need. It would require financial professionals, when making a recommendation, to act in the consumer’s best interest—with care, skill, prudence and diligence—based on the consumer’s financial needs and objectives. It also directs broker-dealers to avoid, mitigate and disclose conflicts of interest.
To be sure, the Reg BI’s scope is limited to financial professionals who operate under the SEC’s purview. That is why the SEC should coordinate with state insurance regulators, the Labor Department, FINRA and Congress to develop a harmonized and uniform best interest standard of care for investment advice. A collaborative approach would ensure all consumers receive retirement savings information and related financial guidance from financial professionals acting in their best interest, regardless of the financial products they purchase.
Carl B. Wilkerson is Vice President and Chief Counsel, Securities at the American Council of Life Insurers