by Kush Ganatra, RBFL Student Editor
A lot of people feel might feel that writing a note topic is supposed to be this dull, tiresome and tedious process that reminds one of just how lonely law school really is. However, there’s a very easy way to avoid that: find love. No, not that kind of love – every 1L’s learned that doesn’t exist. I mean love as in something you’d loveto write about.
I was interested in learning more about the SEC and its role in the aftermath of the financial crisis, so when I was exploring topics and learned about a controversial regulation called Regulation Best Interest (Reg BI), I knew it was love at first sight.
After the financial crisis in 2008, Congress passed Dodd-Frank to minimize the risk of such a catastrophe from recurring. A key provision in this act gave the Securities and Exchange Commission (SEC) rulemaking authority to create a new standard governing the conduct of financial professionals, such as investment advisers and broker dealers, when giving advising retail investors. Specifically, in defining the scope of the SEC’s authority, Congress stated that the new standard must ensure that financial professionals are disinterested when advising retail investors, and that they would be acting in the best interest of retail investors. Moreover, Congress directed the SEC to conduct a study that may reveal any deficiencies in the standard prevailing at the time. The study showed that retail investors were feeling very confused about which standards were applicable to the investment adviser and broker-dealers advising them. This confusion had a negative impact on retail investors.
Part of the SEC’s responsibilities when creating a new standard was to be mindful of any flaws in the current standard the study may expose. Accordingly, the SEC was also required to harmonize the various standards then in existence with the goal to create a standard that retail investors could easily understand when making investment decisions. As a result, the SEC came up with Reg BI, which has faced some controversy recently.
There’s a suit pending in the Southern District of New York challenging regulation BI on several grounds. The first is that Reg BI is outside the scope of the SEC’s authority, because the SEC didn’t rely on the provision in Dodd-Frank granting it rulemaking authority. Moreover, the regulation didn’t expressly prohibit financial professionals from acting in their own interest when advising retail investors. Lastly, Reg BI doesn’t do a good job of creating an unambiguous standard, because the standard it provides leaves key terms, such as “best interest,” undefined. Without any parameters for understanding these terms, retail investors will continue having difficulty interpreting the standard in a way that can help facilitate their decision making, and the standard will be difficult to enforce generally.
My note topic is going to examine the merits of these claims, and propose alternatives to Reg. BI that may better help protect retail investors. One alternative, for example, would be to subject investment advisers and broker-dealers to a disclosure requirement that would better allow retail investors to make informed decisions.