Preserving choice for retail investors while protecting their interests are two of the main objectives of the Securities and Exchange Commission's standards-of-conduct package, Chairman Jay Clayton said in Senate testimony.
At last week's Senate Financial Services and General Government Subcommittee hearing, Mr. Clayton told lawmakers there is no single investment relationship model that's best suited for all investors. Some benefit from a typical broker-dealer commission model while others make out better from an asset-based fee, like from an investment adviser, he said.
"Preserve that choice, preserve the competition, raise the level of conduct required on the brokerage side," Mr. Clayton said May 8 in response to a question from Sen. Chris Coons, D-Del.
SEC commissioners advanced the package, which has become commonly known as Reg BI for one of its three components, in April 2018. One of the three legs requires a client relationship summary, or Form CRS, which necessitates that firms disclose to retail investors the nature and scope of their services, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm's disciplinary history.
The second leg is a proposed standard of conduct for investment advisers that states advisers have a duty to act and provide advice that is in the best interest of the client.
Lastly, Reg BI compels broker-dealers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts. Critics say the proposal does not adequately define the term best interest and wouldn't establish a legally enforceable standard.
There were complaints on the brokerage side that "there was too much activity that people said was lawful but made you sick. We need to fix that," Mr. Clayton told lawmakers.
In prepared testimony, he said it is his intention that "regardless of whether the retail customer chooses a broker-dealer or an investment adviser, the retail customer will receive recommendations (from a broker-dealer) or advice (from an investment adviser) that are in the best interest of the retail customer, and that do not place the financial professional's interests ahead of the interests of the retail customer."
Mr. Clayton is currently one of three Republicans on the commission that also features one Democrat and one vacant seat for which Allison H. Lee, a Democrat, has been nominated.
A final rule package is expected by September.
