The capital markets in the United States are the envy of the world. They provide financing for businesses and opportunities for investors to participate in the growth of companies and the economy. The evolution from employer-sponsored pension plans to workers funding their own retirement has made it all the more critical that savers and investors have access to high-quality investment products and advice.
One of the things that makes our capital markets function so well is a comprehensive regulatory regime. It allows investors to have confidence in the integrity of the system and the advice they are receiving from financial advisors, while preserving their ability to choose from a wide variety of investment products and services. Uniform standards apply equally to all companies and advisors. This allows businesses seeking to raise capital to have access to the widest possible audience and investors to have broad access to investment products, maximizing efficiency for the system and all of the participants.
The primary securities regulators are the SEC and FINRA, but NASAA, the organization of state securities administrators, has recently become more active. NASAA has proposed amendments to their Uniform Business Practices Rule, which includes conduct standards for financial professionals.
A primary goal of NASAA model rules is to encourage uniformity among state regulations applicable to the sale of securities and provision of investment advice. The stated goal of the current amendments is to update state standards to better reflect the recent adoption of SEC Regulation Best Interest, but the proposal goes far beyond that. It would create serious conflicts with Reg BI, upend long-established revenue models and restrict the availability of investment products and services to the detriment of individual investors.
The NASAA proposal has a number of problematic features, including the following:
- A “menu” of different options for states to choose from. Rather than promoting uniformity, this encourages differences among state regulations.
- A presumption that disclosure of conflicts of interest, by itself, would not be sufficient to meet the best interest standard in Reg BI. This is in direct conflict with Reg BI, which requires firms to assess all conflicts and manage them according to their type and severity. Disclosure is often the most effective method.
- A presumption that of any form of compensation other than sales charges and 12b-1 fees are not in the best interest of the customer and would therefore be prohibited.
- Expanding the circumstances under which communications such as advertising would be considered investment recommendations.
On their own, each of these provisions represents a major departure from existing regulations and directly conflicts with Reg BI, but in combination, they would fundamentally alter the business model of all broker/dealers in the United States. Particularly for independent broker/dealers, it would eliminate a significant portion of revenue, requiring fundamental changes to the current practice in which independent advisors receive as much 90% of the revenue from sales charges.
Reg BI has been in effect for a little more than three years. It requires that financial advisors act in the best interest of the customer and added a number of specific protections for investors that give both the SEC and the states all the authority necessary to accomplish the goals of the current proposal.
NASAA and the states have an important role to play in enforcement of the securities laws, particularly with respect to investor protection. They have always been an effective “cop on the beat,” identifying bad actors and seeking restitution for investors who are victims of fraud. They bring important experience and expertise to any discussion about investor protection, and we welcome them as participants in the debate. Layering different and conflicting standards onto existing regulations that are already comprehensive will not help. If adopted in its present form, the NASAA proposal will increase costs and decrease choice for investors and financial advisors. Surely this is not the intended result.
The NASAA proposal has been published, and they are accepting written comments until Dec. 4, 2023. We encourage everyone to review the proposed rules and make your voices heard.
Mark Quinn is Cetera’s Director of Regulatory Affairs
