Statement at the Open Meeting on Regulation Best Interest, the Interpretation of the Standard of Conduct for Investment Advisers, the Form CRS Relationship Summary, and the Interpretation of “Solely Incidental”
June 5, 2019
I would like to begin by thanking Director Dalia Blass [of the Division of Investment Management], Director Brett Redfearn [of the Division Trading and Markets], as well as our Chief Economist S.P. Kothari and former acting Chief Economist Chyhe Becker for their collective leadership in bringing these recommendations to fruition and for steering the process every step of the way. I am also grateful for the unwavering commitment and tireless work of each and every staff member who worked on these recommendations. Collectively, you have brought hundreds of years of experience and expertise to this endeavor. Your dedication to your work, the SEC’s mission, and investors comes as no surprise. Nevertheless, it has been truly remarkable to witness firsthand.
Finally, my thanks to Chairman Clayton. From his earliest days on the job, he prioritized addressing the standards of conduct that apply to brokers and investment advisers when they provide investment advice to retail investors, with a goal of improving the investor experience and the markets.
I. General Thoughts
I support each of the staff’s four recommendations. Before I explain the basis for my votes, I would like to share some general thoughts on this undertaking as a whole.
One area of total agreement among all Commissioners is the importance of the matters on which we are voting today. Collectively, they are of generational significance. The comment files for the proposals make this clear—they literally include thousands of letters from registrants, trade and policy groups, as well as private citizens. Each provided broad, focused, and often passionate views on the SEC’s 2018 proposals, including views about things we got right, things we got wrong, areas in which we went too far, and areas in which we did not go far enough. Many of those commenters followed up with meetings and phone calls with the Divisions’ staffs, the Chairman’s staff, and my and my fellow Commissioners’ staffs. Since joining the Commission, I have had more meetings and discussions on these rulemakings than on any other topic.
B. Investor Choice and High Standards
Some have described the matters on which we are voting today as political issues—or worse, partisan ones. This could not be further from reality. The agenda today is about enabling everyday Americans to receive better investment advice, and at the same time preserving their ability to access that advice from an array of providers, in whatever way is most useful and affordable to them. We are fortunate that the U.S. capital markets have evolved to offer retail investors a wide range of choice in investment products, services, providers, and payment options—my votes today seek to preserve that choice.
Some have tried to cast such choice as unequal and have been quick to villainize “suitability,” and now “best interest,” and lionize “fiduciary duty.” But, as former Commissioner Dan Gallagher once said, “much of the debate on these issues seems to assume that the ‘fiduciary duty’ is some sort of talismanic protection that can overcome any competing regulatory concerns. All too often, this is the approach taken by those who simply do not know how the fiduciary duty works in practice. They do not understand or choose to ignore the limitations of the fiduciary duty.”
The recommendations today by the staff recognize that, in the real world, brokers and advisers provide investment services to retail investors in distinct ways, but one model is not inherently better than the other—it matters with respect to the investor and the context. If we approve these recommendations, we will make the standards of conduct that apply to both providers very similar, but without homogenizing the two business models and compromising important distinctions that allow them to serve different needs in the market.
C. SEC Action Needed
It is clear to me that the need for SEC action in this area has reached a point of urgency. In 2010, Congress required, in Section 913(l)(1) of the Dodd-Frank Act, that the SEC “facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with brokers, dealers, and investment advisers, including any material conflicts of interest.” Congress also asked that the SEC consider enacting “best interest” conduct rules for brokers and advisers when providing investment advice to retail investors. For nearly a decade, the SEC has studied and discussed the issues.
Over this period, other state and Federal regulators have stepped in. In 2016, for example, the DOL acted unilaterally to adopt its so-called “Fiduciary Rule” that would have applied to providers of retirement investment accounts—a significant proportion of the registrants under the SEC’s jurisdiction. DOL’s rule quickly proved unworkable for many, if not all, providers of pay-as-you-go financial services, raising compliance costs, exposing firms to new litigation risks, and in some cases forcing them to choose whether to continue serving some of their smallest customers. According to some, the rule resulted in huge swaths of U.S. investors losing access to affordable financial advice and others paying much higher fees on their retirement accounts, without receiving any increases in service or other discernable benefits. I am glad that this rule is not in effect. But the vacated rule, and recent proposed regulations from multiple states, emphasizes the importance of, and necessity for, SEC action.
I am grateful that our Chairman has been willing to take up this rulemaking and work toward a solution that will more effectively help retail investors when implemented by industry participants.
D. Time-Intensive, Thoughtful Approach
I am impressed with how the SEC staff has developed their recommendations in such a deliberate and studied manner. I can think of no other rulemaking in which so many staff members—from nearly all Divisions and Offices within the SEC—have contributed so many hours of their time. The Divisions of Investment Management, Trading and Markets, and Economic and Risk Analysis have worked together for over a year to review and analyze thousands of comment letters from the public. They have participated in hundreds of meetings with policy groups and industry members. They have hosted seven roundtables across the country, working with our Office of Investor Education and Advocacy and Office of Public Affairs, to gather individual investors together and collect their feedback. They, along with our General Counsel’s Office, have worked with other SEC Divisions and Offices (including the Office of Compliance, Inspections and Examinations, the Division of Enforcement, and the Office of the Investor Advocate) to write, revise, and finalize thousands of pages. This degree of effort is evident in the recommendations presented today.
II. Specific Comments
Now, I will say a few words about why I am supporting each recommendation.
A. Regulation Best Interest
It is clear to me, and likely to anyone who reads this rule and its adopting release, that Regulation Best Interest will enhance the required standard of conduct for brokers when their representatives make recommendations to retail customers. This will be accomplished in a number of ways, including a few that I will highlight.
Regulation Best Interest requires a broker to have a more thorough understanding of the products and the accounts it could offer to a retail customer, including their costs, and refrain from making a recommendation if none of its products or accounts would meet this standard. Beyond this, and perhaps most importantly, when making a recommendation, a broker cannot place its own interest ahead of the retail customer’s. This obligation applies not only during the process of a broker making a recommendation, but extends (through the Conflict of Interest Obligation) to the way a broker designs its product menus and compensates its personnel.
If Regulation Best Interest just stopped there, it would already be a greatly elevated set of obligations for brokers. But, the rule goes further; banning high-pressure product-specific sales contests, which can motivate associated persons to push customers toward investments for the broker’s or associated person’s own benefit. Regulation Best Interest also will impose heightened disclosure requirements about brokers, their investment offerings, and associated conflicts of interest in order to better inform retail customers about their service provider and investing options.
I recognize that the implementation and ongoing costs to the brokerage industry will be significant. For those firms that are already at the leading edge of compliance, transparency, and client-focused practices, this rulemaking may not impose much additional burden. For other firms, Regulation Best Interest will require reconfiguration of business practices, compensation structures, disclosure practices, and recordkeeping work. While I have considered that the costs involved may be high, I believe that they are justified by the resulting benefits.
B. Fiduciary Interpretation
Second, I believe the interpretation of the Investment Advisers Act of 1940 (“Advisers Act”) fiduciary standard of conduct for investment advisers provides helpful clarity with respect to the Commission’s views. This clarity is important so that investors, market participants, their counsels, and the public can compare and contrast an adviser’s fiduciary standard of conduct against a broker’s best interest obligation. This clarity also is important to serve as guideposts regarding our expectations from advisers, and I believe we should conduct our oversight of advisers accordingly.
C. Relationship Summary
Third, the Relationship Summary that brokers and investment advisers will need to deliver to retail investors will increase the transparency and clarity surrounding the relationship that investors have with these firms. I look forward to seeing this in action, and I am pleased that we have permitted firms to make either paper-based or electronic disclosures (including interactive mechanisms) for conveying this important information to investors. This is just one example of the staff listening to public feedback on the original proposal. I recognize that this new requirement will not come without cost or burden, as discussed in the release. Nevertheless, it is clear to me that the staff has sought to account for costs and other concerns and weigh them against the resulting benefits to retail investors.
D. “Solely Incidental” Interpretation
Lastly, the interpretation of the “solely incidental” prong of section 202(a)(11)(C) of the Advisers Act will give the brokerage community clarity it has sought for quite some time, which should create more distinct bounds around the need to register with the SEC as an investment adviser. I applaud the staff and the Commission for putting this, and all of these recommendations, forward as part of a comprehensive package.
III. Just the Beginning
Having said that, my votes of support today by no means signal an end to our work—in many ways, they are only the beginning. The next year will be an important period during which market participants will analyze and implement these new requirements. The robust feedback we received over the last year was extremely helpful in developing these recommendations. I encourage the industry and investors to continue to share their views, especially where additional clarity and guidance may be needed.
The SEC must engage proactively with the industry and the public to promote a smooth and efficient implementation of these new rules. For example, I think it would be incredibly helpful for the staff to provide a chart showing a high-level comparison of key aspects of the fiduciary standard for investment advisers and the best interest standard for brokers. I understand that the Chairman intends to put this forward, and I am very grateful. We should provide more clarity on the differences and nuances with respect to the broker and adviser standards of conduct so that firms can understand their obligations. This is especially true for smaller firms that may not have the resources to engage counsel to distill the several lengthy documents that make up the rulemaking package.
As stated in the Regulation Best Interest adopting release: “The Commission’s staff will offer firms significant assistance and support during the transition period and thereafter with the aim of helping to ensure that the investor protections and other benefits of the final rule are implemented in an efficient and effective manner. Further, we will continue to monitor the effectiveness of Regulation Best Interest in achieving the Commission’s goals.” Since we will likely receive questions on this package of rules and interpretations, staff responses to “FAQs” seem like another logical follow-up initiative. I encourage the staff to engage with interested parties and consider their questions in short order, and then prepare and post answers on an ongoing basis. Not only will these measures help market participants understand and comply with our rules, they will benefit the retail investors through increased compliance.
Following implementation, the SEC must also promote compliance through consistent examinations. I urge OCIE to work with FINRA in developing examination plans that can evaluate broker compliance with these new rules in a methodical and consistent way. I also believe we must look to the results of these examinations to inform our policy-making, as these exams will provide us with first-hand, real-world insight into how registrants are putting our rules into practice.
We also need to enforce our rules where we encounter bad actors, so that retail investors are protected. This applies to registrants’ obligations under our new rules, as well as those that have existed before today.
In closing, I would like to again commend everyone within the SEC who has contributed to such a monumental undertaking. I would also like to thank those outside the SEC who devoted their time and attention to this process, whether by writing a comment letter, filling out a feedback form, meeting with people here at the Commission or at the roundtables, or by participating in any of the surveys or studies that informed the staff’s work today. These recommendations are better because of your input.
Lastly, many will offer their opinions in the coming days, weeks, and likely longer term about whether this package of improvements is too weak or too draconian, or—as I hope—just right. But for those members of the public who have taken an interest in this endeavor, my ask is that you please read these releases before forming your opinion. I, for one, believe these rules will improve the investment advice retail investors receive, and investors and our markets will be better for it.
 Chairman Jay Clayton, “Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers” (June 1, 2017).
 Commissioner Daniel M. Gallagher, “Remarks at The SEC Speaks in 2015” (Feb. 20, 2015), https://www.sec.gov/news/speech/022015-spchcdmg.html
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).
 See Section 913(l) of the Dodd-Frank Act, which states that the SEC shall (emphasis added) “facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with brokers, dealers, and investment advisers, including any material conflicts of interest.”
 See Section 913(g) of the Dodd-Frank Act, which states that the SEC may (emphasis added) “promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”
 Chamber of Commerce of the United States v. United States DOL, 2018 U.S. App. LEXIS 6472 (5th Cir. 2018).
 See, e.g., Nevada Office of the Secretary of State, Notice of Draft Regulations and Request for Comment (Jan. I 8, 2019).
 Regulation Best Interest: The Broker-Dealer Standard of Conduct, Rel. No. 34-86031 (June 5, 2019).
 Form CRS Relationship Summary; Amendments to Form A, Rel. No. 34-86032, IA-5247 (June 5, 2019).
 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Rel. No. IA-5248 (June 5, 2019).
 Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser, Rel. No. IA-5249 (June 5, 2019).