Several former SEC economists have given the Economic Analysis (EA) underlying the Commission’s April 2018 investment advice proposals an “incomplete.”
In a Feb. 6 letter, 11 former chief economists, whose service spanned from the early 1980s to 2016, wrote that they “find it worrisome that the proposals’ economic analysis does not fully consider some potentially important dimensions of the retail client-adviser relationship.”
In comments reminiscent of the 2011 criticisms of the Department of Labor’s then-proposed fiduciary rule, the economists note that they find the economic analysis “weak and incomplete in at least three specific dimensions” and further suggest that it appears inconsistent with parts of the SEC’s own adopted guidance for developing a rule’s Economic Analysis.
“As the Commission’s own Guidance emphasizes, sound policy must first identify a new rule’s purpose. Furthermore, plausible alternatives to a proposed policy cannot be identified without clearly understanding the problem being addressed,” the economist write. “Unfortunately, the Commission’s Economic Analysis of its April 2018 proposals fails to consider adequately any of these potential problems as the target of the proposed rules.”
The letter further explains that the EA identifies the main economic problem as the possibility that brokers and their customers might misunderstand one another’s assessments of the appropriate risk-return tradeoff, but in response, the EA suggests that a mandatory standard of adviser behavior might improve communication between the broker and the customer.
“Nowhere does the EA emphasize that an adviser’s compensation provides numerous opportunities for her to favor one investment over another on the basis of the compensation it pays to her or to her firm,” the letter states.
Pending Questions
Further addressing the purported incompleteness of the analysis, the economists identify several additional questions they believe should be addressed, such as:
- Does disclosure or potential conflicts of interest provide customers with the information required to make informed choices?
- Does an adviser’s superior knowledge of financial issues make it difficult for a retail customer to understand when a broker is working against his interests?
- Are customers confused about the fiduciary responsibilities of IAs vs. BDs who offer financial advice? If so, is that confusion important?
- Should advisers be permitted to sell only their own company’s products, or must they provide access to a broad range of products that might benefit the customer?
- Should IAs and BDs be subject to the same standards in protecting a customer’s “best interest”?
- Might imposing new standards of behavior lead to higher prices for financial advice or otherwise limit some customers’ access to good financial advice? Is this likely to be true?
What’s more, the economists note that, while the proposed Form CRS seems to provide some useful information to new advice customers, they say they are unaware of any requirement that an adviser provide a “single, easy-to-digest periodic report summarizing the retail customer’s actual cost of managing her funds,” nor are they aware of whether the disclosures enable retail customers to understand the implications for their own welfare.
“We feel (preliminarily) that the new CRS forms would provide some helpful information. But we would far prefer for there to be evidence that the intended targets of these disclosures feel the same,” the letter explains.
The letter closes by noting that some of the economic analyses’ shortcomings may reflect policy conflicts within a Commission that may feel pressured to “do something” in the wake of the DOL’s recent experience.
“In our experience, agreeing on the economic need for a new rule often helps produce a more coherent and effective rule. This practice may be particularly relevant here, because the issues surrounding retail financial advice are many and difficult,” the economists emphasize.
The SEC previously set a target date of September 2019 to finalize its proposed package of investment advice rulemaking.
Scrutiny of the SEC’s proposals seem to be ramping up. In fact, a House Financial Services subcommittee recently announced that it plans to hold a hearing to review the SEC’s proposed Regulation Best Interest.
