Craig Martin had something to say to the Securities and Exchange Commission (SEC).
The founder and president of the Family Wealth Consulting Group, a $100 million RIA based in San Jose, California, was furious at the SEC’s ‘regulation best interest’ proposal to overhaul broker-dealer conduct. He felt that it did not do enough to distinguish between brokers and fiduciaries in a new relationship summary document that advisors and brokers alike would be required to give to their clients.
So Martin sat down at his computer at 5:30am, dashed off a 1,084-word letter to the commission during its solicitation period for public comment… and promptly forgot about it.
‘I sat down and tapped that thing out quick, pushed the “send” button, felt good about it in the moment and then thought: “Well, that was a waste of effort.” I closed my books to it,’ Martin said.
As the SEC’s proposal circulates for public comment until August 7, Martin – like many people in the RIA industry – is feeling isolated.
‘I’m a little bit jaundiced in that any time I see a 913-page document on what should be a very straightforward proposal, I feel a little queasy,’ said Elliot Weissbluth, founder and chief executive officer of HighTower, a roll-up RIA with $55 billion in assets under management. ‘Once again, you have a federal agency that’s taking what should be a fairly straightforward concept and complicating it. My assumption, which unfortunately tends to be accurate, is that the complications are not going to be good for the end clients, but will be good for the industry and for the people that are trying to advance their commercial gain.’
Meanwhile, the SEC has been touting its efforts to solicit public comment on the hefty tome and is launching a series of roadshows across the country to talk with retail investors. The first was in Atlanta on June 13.
By May 29, the commission had received just 17 public comments on the ‘regulation best interest’ proposal, which would require broker-dealers to mitigate or eliminate their conflicts of interest without becoming fiduciaries to their clients. That number escalated to 116 comments by June 7 after an AARP action alert. The relationship summary document proposal which drew Martin’s ire has received just 11 comments. Some of the comments are anonymous, while others are little longer than a paragraph.
‘The vast majority of Americans lack adequate knowledge about the true and complete costs, potential benefits, risks and alternatives for various investment options,’ wrote retiree Jerry Vertal. ‘Brokers, financial advisors, etc. often promote investment products that are not in the best interests and that are not optimal for their clients and potential clients. All brokers, financial advisors, etc. should be required to be fiduciaries and should be obligated to act in the best interests of their clients.’
Meanwhile, in his letter, Martin wrote that the relationship summary document’s ‘relationships and services’ section contained ‘weasel language’ that a broker-dealer could use to evade responsibility for selling risky products in an arbitration hearing. He told Citywire that he doesn’t expect the commission to give his letter much thought.
‘We’re asking the wrong people to make decisions for us,’ he said. ‘We’re asking people who have vested interests in firstly, preserving their jobs and secondly, focusing on one part of the industry that gives them the most money. The purpose of the SEC is to protect the public, but it has evolved into something entirely different.’
Setting structural critiques of the SEC aside for a moment, the dearth of comments so far can partly be chalked up to the calendar. The comment period will be open for two more months, and the final proposal that the SEC ultimately votes on will look very different from its current iteration.
Several RIAs declined to comment on the proposal to Citywire for that simple reason: It’s just too early. ‘We haven’t seen a lot of activity from advisors,’ said Matt Matrisian, senior vice-president of strategic initiatives at AssetMark, a $44 billion investment platform and consultant for RIAs. ‘I think advisors are looking at it and saying, “OK, they’re requesting comment. Is this really going to be implemented or not?” Or “I don’t have to worry about it until my broker-dealers are telling me I have to worry about it.”’
Matrisian added that he expects activity on the proposal to pick up in the fourth quarter, when the rule is refined and submitted for final approval.
‘When you start to have large institutions providing comment – and I think that that will come, specifically from the broker-dealers – that’s going to help shape the rule significantly,’ he added. ‘To the extent that independent RIAs are providing comment, there will be some influence, but more so from organizations such as the Financial Planning Association, the Securities Industry and Financial Markets Association, the Financial Services Institute and broker-dealers themselves.
‘You have these large enterprises or constituencies representing a large segment of the advisor base on behalf of the industry. That’s going to carry more weight,’ Matrisian said.
Talk at the top
The SEC discloses the associations and companies that it meets with during the rulemaking process. The big broker-dealer trade groups aren’t on the list – yet – but top officials from the commission have met with representatives from AARP, the AFL-CIO, AXA Equitable Life Insurance, AIG and the Institute for the Fiduciary Standard (IFS).
Knut Rostad, IFS president, told Citywire that he felt the SEC had lent an open ear to what he had to say. Rostad spoke with Marc Sharma, chief counsel for the SEC’s Office of the Investor Advocate on May 10, the commission’s records show.
‘There are some in the SEC who I think are far more interested in our points of view than others. I think the investor advocate [Rick Fleming] understands exactly and completely what is best for investors. There’s no misunderstanding there whatsoever,’ Rostad said. ‘The bottom line is that there are others in the commission that have a different view.’
Rostad indicated that the IFS will continue to speak out during the comment process as the SEC refines the proposals. By the time the rule is marked up, though, the five-member commission could have a totally different look.
Commissioner Michael Piwowar will step down by July 7, and Kara Stein – who cast the sole vote against advancing the proposal to public comment in April – is slated to depart by the end of the year. The personnel changes could leave the commission with four or even three members during the critical votes.
What the final rule proposal will look like is an open question, and so is the matter of who will decide its fate. ‘It’s uncertain where the votes are going to come from for a final rule,’ Rostad said.