5 Ways The SEC Says "Screw You" to Investors with Regulation Best Interest

SEC New Regulation Best Interest is in the best interest of the Broker/Dealer Companies

The recent approval of the SEC’s Regulation Best Interest (Reg BI) has killed any hope that financial advisers at Broker/Dealers would finally be required to be fiduciaries for their clients. (Currently, only Registered Investment Advisers are legally fiduciaries). The regulation could also make it harder for the Department of Labor to again attempt to require all financial advisers on retirement accounts to be fiduciaries.

The SEC went out of its way to create a regulation that would confuse consumers into thinking they have legal protections, when they don’t. Even worse, the SEC has designed Regulation Best Interest to give Broker/Dealers’ attorneys’ everything they need to avoid liability when one of their financial advisors gives bad advice.

The regulation does accomplish one major industry goal: to allow Broker/Dealers to confuse investors with advertising that makes it sound like they are fiduciaries.

If you have a financial advisor or are looking for one, you should immediately ask them to sign the fiduciary oath found at the Committee for the Fiduciary Standard. If they don’t, find another advisor.

How Regulation Best Interest Will Screw Consumers

The rule relies on a weak mix of measures that are unlikely to make much difference in improving the advice ordinary Americans receive from brokers.
— SEC Commissioner Robert Jackson

Reg BI borrows elements of the language of the fiduciary standard, but wraps it in legalese designed to confuse consumers and protect the Broker/Dealer side of the investment advice industry. The regulation doesn’t define what “best interest” is, nor does it prescribe how a Broker/Dealer should act in advising clients. The regulation does, however, explicitly state Broker/Dealers and their representatives are not fiduciaries.

Screw You #1: REG BI Language Is Designed to Allow Stock Brokers to Harm Investors and Avoid Liability

Research demonstrates the legal language specifically chosen by the SEC has a history of being used to harm consumers and avoid legal liability for advisers. SEC Commissioner Jackson’s office found compelling evidence that the SEC’s langage not only won’t protect consumers, but may actually be used to harm consumers. Commissioner Jackson’s office analyzed half a million investment advisor disclosures and compared the language in the advisor’s regulatory brochures to the language in Reg BI. The research found a high correlation between the language chosen by the SEC and advisory firms which offered conflicted advice more likely to result in investor harm or fraud.

Advisers who use the language in today’s release [Regulation Best Interest] are much more likely to offer conflicted advice. And a well-known study shows that conflicted advice is the kind that leads to fraud that can hurt investors.
— SEC Commissioner Jackson

Screw You #2: Reg BI Doesn’t Actually Require A Broker/Dealer to Work in Your Best Interest

In an impressive feat of bait and switch, Reg BI uses the term “Best Interest” 1,213 times without ever actually requiring the Broker/Dealer or their employees to place their client’s interests above their own. Instead, the Broker must offer advice that is “consistent with the best interests of the investor.” While the addition of the phrase ‘consistent with’ may seem innocuous, it completely changes the legal meaning of ‘best interest.’

Retail investors should not trust their brokers.  [Reg BI language] means that a customer cannot rely on a broker to actually act in their best interest.  The same conflicts will continue to bias investment advice.
— Benjamin Edwards, Professor of Law at University of Nevada, Las Vegas.

Screw You #3: Adviser Compensation Practices that Put Investors at Risk Are Expressly Allowed

The SEC is touting Reg BI for its clamping down on adviser compensation practices that put investors at risk, like sales contests or incentives to push high-profit products. What the SEC isn’t saying in their press releases is Reg BI only stops those practices if they are accompanied by a short window of time for the sale or if they create “high-pressure situations.” Reg BI expressly allows compensation and incentive structures that encourage brokers to push high-cost products so long as those two limitations are not present.

I cannot see why our rules should permit pay practices that create any pressure for brokers to harm investors.
— SEC Commissioner Jackson

Screw You #4: Bad Advice is Fine So Long as the Broker’s fine print Has Ample Disclosures

Reg BI has a long list ‘requirements’ for Broker/Dealers to comply with, mostly surrounding disclosing to the consumer how their advisor may be offering conflicted advice or not working in the client’s best interest. Additionally, Reg BI does not identify how a Broker/Dealer should work in the client’s best interest, only that they must bury statements of conflicts of interest within the pages of fine-print in the contracts and disclosures.

The underlying message is that there is nothing short of outright fraud that the investment advisers can’t address through disclosure alone.
— Barbara Roper, Director of Investor Protection at the Consumer Federation of America.

Bonus Screw You: The SEC Attempts to Water Down the Registered Investment Advisor Fiduciary Duty

Adding a final insult to injury, the SEC may have unwittingly revealed its true intent to eliminate any fiduciary duty when an investor receives investment advice. In addition to approving a regulation that seems custom written to benefit the Broker/Dealer industry at the expense of the investing public, the SEC also walked back decades of regulatory history for Registered Investment Advisors. Reg BI asserts that even Registered Investment Advisors are not fiduciaries, despite case law and the SEC’s own regulatory history to the contrary.

The Supreme Court, in the case SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), held that this provision of the IAA imposes a fiduciary duty on investment advisers.
— Justia

Big Takeaway:

You can not rely on the SEC to protect you against financial advisors who want to enrich themselves and their companies at your expense. Make sure your adviser is a fiduciary and have them sign a fiduciary oath (which is usable in court). If they don’t want to sign, find another advisor.


Joshua Escalante Troesh is a Tenured Professor of Business and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a Registered Investment Advisory firm and is proud to sign a fiduciary oath to clients. He can be reached for comment at info@purposefulfinance.org