Samantha DeZur


March 13, 2019


Back in 2018 when the SEC proposed rules around the conduct of financial professionals providing advice, I wrote:

No two Americans are the same. We come from different backgrounds and we have different goals, different lifestyles, and different needs. We also have different financial situations, so it’s a good thing that, in the complex world of investing, there are several types of financial professionals to help people save for their futures.

Congress is now looking into the issue and is holding a hearing tomorrow to examine whether the SEC’s proposed best interest rules “put investors first.” The answer is yes, they do.

Critics of the rule have said the proposed rules don’t go far enough and simply allow for status quo. We explain why they are wrong in the letter we sent to the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. In short, the proposals would considerably improve protections for retail investors, ensuring they receive appropriate investment advice. Below is a short summary of those protections.

One regulator, one set of regulations

A final SEC rule will apply to all investment accounts across the country, likely reducing the likelihood that states will introduce their own best interest proposals. One federal rule, rather than varying state standards, will protect allinvestors and ensure each investor receives equal treatment, no matter where they live.

Better disclosures

While the structure of the SEC’s proposed Form CRS may need some improvement, a new, investor-friendly disclosure document will provide investors with the information they need to make investment decisions. Investors will be better protected from misinformation or a lack of clarity around their options.

Protection from bad actors

The SEC’s proposed rules would specifically require broker-dealers and investment advisers to act in the best interest of their clients by mitigating or eliminating conflicts of interest and providing enhanced disclosures, on top of existing regulatory requirements ensuring they provide “suitable” recommendations for investors. Investment professionals providing misleading advice or recommending products in their own self-interest will be penalized.

Elimination of product-based sales incentives

The SEC has made clear that they will eliminate sales contests that reward financial professionals for promoting a specific product. These types of contests have the potential to incentivize financial professionals to recommend a product to an investor even if the product is not the most suitable for that particular investor. Investors will now be protected from receiving product recommendations that may not be in their best interest.

Protection for small investors

The SEC has stressed the need to preserve the brokerage business model. Newer investors or those only investing a small amount tend to benefit most from the brokerage model. For many of these types of investors, an advisory model would not be feasible or cost-effective. The SEC’s rules will protect small and new investors and ensure they continue to have access to investment advice through the brokerage model.

While these protections are a great step in the right direction, the proposed rules are not perfect. For example, the proposed new form (Form CRS) that is mentioned above needs a lot of work to actually provide information in a useful way to investors. We go through our concerns in the comment letter we sent to the SEC in August 2018.

But the proposals are just that – proposals. They are not final regulations. The SEC received thousands of comments on the proposals and is in the process of making changes based on feedback from all different types of stakeholders.

While the SEC’s proposed best interest rules may need some work, they would still provide extensive investor protections and make it easier for investors to receive sound financial advice. We should let the SEC finish their work and finalize these important regulations.

About the authors

Samantha DeZur