Statement at the Open Meeting on Standards of Conduct for Investment Professionals

Commissioner Hester M. Peirce

April 18, 2018

I want to begin by thanking the Chairman for making this rulemaking a priority for the Commission. There has been tremendous confusion in recent years among retail investors about what legal standards apply and what type of financial professional they are engaging to provide them with investment advice. To get us to today's recommended proposals, many hours and much hard work were expended by staff in the Divisions of Trading and Markets, Investment Management, and Economic and Risk Analysis, together with the General Counsel's Office, the Office of Investor Education and Advocacy, the Chairman's staff, and many others throughout the Agency. Thank you all for your efforts.

As you will hear from my comments, I share some of my colleagues' concerns, including concerns about the rule's lack of clarity. Nevertheless, I do not agree with the assessment that the emperor has no clothes. If this proposal is adopted, the emperor will be wearing more clothes than he is wearing now. It is not clear whether it is a cape or sweater that he will be adding to his wardrobe, but he will be wearing an extra layer. Getting comments from retail investors, other regulators, and the professionals who deal with retail investors every day will help us to clarify the rule text. I do not agree that the economic analysis should be modelled on the analysis that the Department of Labor conducted for its rule. It can be tempting to try to assign precise numbers to costs and benefits, but underlying such precision are often assumptions. When those assumptions are flawed, so too are the numbers they produce.

I support putting these proposals out for comment. My hope is that today's proposals are a step along the way to the ultimate adoption of a clear standard for broker-dealers to abide by when providing investment advice to retail investors; clear, simple, and informative disclosure for retail investors choosing a financial professional; and clarity as to investment advisers' duties to clients. Done right, this package will result in clear guideposts for investors, regulators, and providers of financial services. I hope that whatever is ultimately adopted preserves investor choice, so that retail customers still have the option to choose how and where to seek investment advice.

Today's proposals, I anticipate, will generate substantial feedback as to what the proposals get right and, more importantly for producing a strong set of final rules, where they miss the mark. To that end, each release contains many questions. I have a number of concerns, on which I particularly welcome feedback.

Anyone who endeavors to read all the releases will be daunted by their collective heft. SEC printers are all crying out for new toner cartridges, and lugging our best interest binders around the halls has become a substitute for going to the SEC gym. While the length of these releases provides lots of fodder for jokes, it's a serious matter. It makes it difficult for readers to understand what we are proposing, and thus harder for us to elicit comment on key points. In a proposal asking our registrants to be clear with their customers, we ought ourselves to provide clear standards and requirements for our registrants.

Disclosure should be the centerpiece of our reforms. We are proposing today a new customer or client relationship summary. The most valuable aspect of the relationship summary may be the list of questions included at the end, which may help to inspire a healthy skepticism and inquisitiveness in investors. The rest of the summary may not be as useful. While I favor requiring firms to spell out clearly the services they are offering and the fees they charge, I am concerned that the approach we are taking will simply mean a few more pages of unread paper landing in investor trash cans. Specifically, I am concerned that:

Regulation Best Interest responds to calls—dating back years—for a revamped broker-dealer conduct standard. Although "suitability" has become something of an unspeakable word, it is a standard that has served investors well. There have nevertheless been loud, persistent calls for a more robust standard. I am not necessarily averse to creating such a standard, but we must be clear about what we are doing and about how broker-dealers can comply with it. The proposal lacks clarity on both issues, and I am concerned that, if it is not refined through the public comment process, it will be unworkable as a final standard.

This rulemaking package includes a proposed interpretation intended to provide some definition to the fiduciary standard applicable to investment advisers. Collecting in one place the pieces of this standard is a valuable undertaking. It will be useful to investors, investment advisers, and the Commission. I look forward to hearing feedback about whether we have appropriately captured the fiduciary standard as it is currently understood. I have several concerns about this portion of the package:

A final global concern is that these proposals will change for the worse the way investors and their financial professionals interact. We do not want to turn an investor's visit to her investment adviser or broker-dealer into a sterile compliance exercise that focuses on delivering a pile of documents and checking off a list of required disclosures rather than engaging with the investor's needs. An interaction scripted to satisfy regulators risks leaving investors entirely unsatisfied. First-time investors who would benefit from saving even fifty or a hundred dollars a month may be intimidated by basic terms like "stocks" and "bonds" and "mutual funds." What many of these investors need is simply a frank, earnest, non-technical conversation with a professional who can persuade them to start putting away a bit of money. I worry that what this package may provide instead is just another excuse, in the form of more disclosures involving even more challenging terms like "fiduciary" and "best interest," for them to avoid thinking about their finances at all.

These proposals are an extensive undertaking, so my list of concerns is also extensive. Notwithstanding these concerns, however, I believe that the proposals represent an excellent first step down the path of reform: They grapple seriously with possible solutions to investor confusion; they attempt to clarify an often-amorphously defined fiduciary standard for investment advisers; and they attempt to clarify, codify, and confirm that broker-dealers need to make recommendations to retail customers that are not driven primarily by the potential fees they can generate. I look forward to hearing from commenters about these and other issues.

I want to close by again commending the staff for their unflagging commitment to this difficult, but important project. Your willingness to work with us through many difficult questions made the proposals better. I know there is still a lot of hard work ahead, but I am confident that—after a bit of rest—you will all enthusiastically take on the next phase of this important rulemaking.


[1] Merriam Webster, online dictionary, https://www.merriam-webster.com/dictionary/monitor?utm_campaign=sd&utm_medium=serp&utm_source=jsonld.