Without Fixes SEC Advice Standard Will Harm Investors, CFA Warns
Unless the Securities Exchange Commission (SEC) adopts extensive changes to its proposed “best interest” standard for broker-dealers, Regulation Best Interest will end up depriving investors of protections they currently receive and misleading them into expecting protections the rule does not deliver, CFA Director of Investor Protection Barbara Roper warned in March testimony before the House Subcommittee on Investor Protection, Entrepreneurship, and Capital Formation.
- At the hearing, Roper outlined key shortcomings in the proposed rule and practical solutions for correcting those shortcomings, while working within the Commission’s chosen regulatory approach. Top priorities include:
Adopting a principles-based definition of “best interest” that clearly enhances protections afforded under the existing FINRA suitability standard;
- Strengthening the prohibition on placing the broker’s interests ahead of the customer’s interests and including that prohibition in the operational provisions of the rule;
- Making clear that firms are prohibited from artificially creating harmful incentives that encourage and reward advice that is not in customers’ best interests;
- Requiring brokers in ongoing relationships of trust and confidence with their customers to provide ongoing account monitoring and maintenance tailored to that role;
- Strengthening the proposed guidance regarding investment advisers’ fiduciary obligations by recognizing that the obligation to act in the client’s best interests cannot be satisfied through disclosure alone; and
- Revising, retesting, and re-proposing the Customer Relationship Summary so that it fulfills its intended function of enabling investors to determine which type of investment account would best serve their needs.
“There is still time for the SEC to fix Reg BI so that it truly puts investors’ interests first,” Roper stated in her testimony. “With the Commission reportedly putting the finishing touches on this regulatory package, however, that time is running out.”
Meanwhile, because the SEC failed to propose a strong or uniform standard for all securities accounts, some states have begun to consider actions they could take to strengthen protections for their citizens. Farthest along in that process is Nevada, which issued proposed regulations earlier this year that would hold brokers and advisers alike to a fiduciary duty to act in their customers’ best interest when providing investment advice.
CFA joined with 15 other state and national groups to submit a comment letter in March in general support of the proposed rules. The groups praised certain provisions of the Nevada proposal that are “vastly more protective of investors” than corresponding provisions in the SEC rule proposal. These include provisions that prohibit brokers from jumping back and forth between advisory and sales relationships when dealing with clients and prohibiting brokers who rely on an exemption for exclusively sales-based relationships from holding out as advisers either through the titles they use or they manner in which they market their services.
On the other hand, the groups urged Nevada to clarify what’s required under the fiduciary standard and to reinforce that standard with strong anti-conflict requirements. “This will help to ensure that advice is not tainted by conflicts of interest, to investors’ detriment,” the groups wrote.
“With federal regulators more concerned with protecting the broker-dealer industry’s interests over retail investors’, it’s entirely appropriate for states to step in and provide the protections to retail investors that they need and expect,” said CFA Financial Services Counsel Micah Hauptman. “If done right, the Nevada proposal could serve as a model for other states that truly puts investors’ interests first, rather than provide the mere slogan of doing so.”
Groups Call for Rapid Adoption of Alternative Credit Scoring Approaches for Mortgage Lending
CFA joined the Leadership Conference on Civil and Human Rights (LCCHR), National Fair Housing Alliance (NFHA) and Woodstock Institute last month in urging the Federal Housing Finance Agency (FHFA) to support more rapid adoption of alternative credit scoring approaches for mortgage lending to make the mortgage lending process accessible to the broadest possible number of consumers.
FHFA is the conservator and regulator of Fannie Mae and Freddie Mac (the GSEs), the dominant funders of mortgage credit in today’s market. Currently, the two companies only permit the use of one credit score by lenders seeking to sell or securitize mortgage loans through the companies – the “FICO” score provided by Fair Isaacs. Moreover, the only score authorized by the companies at this time is the so-called “Classic FICO,” which has not been updated in many years.
Because neither Fannie nor Freddie has been willing to adopt newer models from FICO or other competitors, such as Vantage Score LLC, Congress passed legislation last year directing FHFA to establish standards and criteria for the validation and approval of credit scoring models.
“Having a process in place for Fannie and Freddie to regularly assess new and emerging models to ensure as many consumers as possible are judged as fairly and comprehensively as possible is a critical part of assuring broad and fair access to responsible mortgage credit,” noted Barry Zigas, CFA Director of Housing Policy. “FHFA’s draft rule is a good step in this direction but needs further improvement.”
The groups urged FHFA to find ways to shorten proposed time lines for assessing new scores, noting rapid cycle times in emerging technologies and the GSEs’ own underwriting engines.
The groups also opposed FHFA’s proposed restriction on the adoption of any scores from companies in which credit reporting agencies have a financial or ownership stake. At present this prohibition would apply only to Vantage Score. The letter noted that the concerns about anti-trust and anti-competitive pricing cited in the proposed rule have been addressed in litigation and resolved in favor of Vantage Score, and that scores from both FICO and Vantage Score are in wide use by other creditors in auto and consumer lending without any evidence of the anti-competitive concerns cited in the proposed rule.
“We support FHFA direction to the GSEs not only to incorporate the latest tested and verified credit scoring models available, but also to open up their process to other scores than FICO and over time other models that may emerge,” the letter stated. “This would bring the mortgage marketplace in line with other credit markets and, we believe, help assure the broadest possible access to GSE mortgage credit.”
Administration’s Delay and Continued Assault on Efficiency Standards Costs Consumers Billions
The Trump Administration’s continued assault on energy efficiency standards not only wastes energy, it is costing consumers billions, undermining environmental protections, and hurting the economy at large, CFA Senior Fellow Mark Cooper and Director of Energy Programs Mel Hall-Crawford underscored in testimony submitted to a House Subcommittee in March.
In CFA’s statement to the House Subcommittee on Energy for its hearing, “Wasted Energy: DOE’s Inaction on Efficiency Standards and Its Impact on Consumers and the Climate,” Cooper and Hall-Crawford highlighted the benefits of energy efficiency standards as well as the cost to consumers resulting from the DOE’s inaction on efficiency standards.
“Triggered four decades ago by the oil price shocks of the 1970s, the use of standards to promote energy efficiency has enjoyed a remarkable degree of bipartisan and public support,” they wrote. “This support stems in large measure from the obvious benefits of efficiency. In addition to the massive pocketbook savings to consumers that help to grow the economy, the national security, public health and environmental benefits are substantial.”
Even using very conservative assumptions, they wrote, “CFA estimates that past rules, including macroeconomic benefits, have already saved consumers approximately $70 billion. If the DOE meets its administrative responsibility, future efficiency standards could lead to:
- $720 billion in direct pocketbook savings;
- $500 billion in indirect, macroeconomic benefits; and,
- An overall 5-to-1 benefit cost ratio.”
The takeaway message from Cooper and Crawford: “consumers support efficiency standards because they save them money. They also help to protect the environment. Not updating the standards eliminates the benefits to our economy that energy savings provide, and adds to climate change.”
Cooper delivered a similar message at February’s Department of Energy public hearing on its proposal to roll back efficiency standards for certain lighting products. CFA urged the Department to withdraw its proposal, which would cost consumers $12 billion in lost energy savings.
“The Trump Administration has been on an all-out assault on efficiency standards that save consumers money and help grow our economy,” Cooper said. “Our analysis shows that this is the single most important consumer pocketbook issue facing regulatory policymakers.”
CFA plans to submit comments to DOE on its proposal to roll back lighting efficiency standards by the May 4th deadline.
CDC Urged Not to Downplay Risks Associated with Antibiotic Resistance
CFA joined members of the Keep Antibiotics Working coalition in submitting a letter to the Center for Disease Control and Prevention in March, asking the agency to improve risk communication on antibiotic resistant foodborne pathogens. Written in response to troubling recent reports downplaying the risks associated with the identified resistance, the letter urged the CDC “to include warnings for at-risk populations in future reporting on outbreaks caused by antibiotic resistant pathogens.”
“Currently, CDC’s reporting on foodborne illness outbreaks includes-appropriately-information on the antibiotic resistance of outbreak isolates.” However, some recent reports, such as a 2018 report on Salmonella Redding in turkey, have downplayed the risks of antibiotic resistance. In response, the groups urged the CDC to “acknowledge when outbreak isolates are resistant to treatments of choice, and indicate that using second- or third-choice drugs have associated costs and risks.”
In addition, they urged the CDC to “inform the public about other potential risks associated with multi-drug resistant isolates… [and] about the correlation between certain antibiotic resistance and virulence traits.”
“Effective risk communication is critical to protecting consumers from foodborne illness,” said CFA Director of Food Policy Thomas Gremillion. “Antibiotic resistant pathogens pose a special hazard to certain individuals, such as those who have recently taken a course of antibiotics, and CDC should explain that in its notices.”
Congressional, Administration Leaders Address CFA Food Policy Conference
Attendees at the 42nd National Food Policy Conference, hosted by the Consumer Federation of America earlier this month, heard keynote speeches from Sen. Debbie Stabenow (D-MI), Rep. Chellie Pingree (D-ME), Frank Yiannas, Deputy Commissioner for Food Policy & Response at the U.S. Food and Drug Administration, and Dr. Mindy Brashears, U.S. Department of Agriculture Deputy Under Secretary for Food Safety.
In addition to the keynote speakers, the conference featured facilitated discussions on such topics as Food Policy in the 116th Congress and Environmentally Sustainable Food. There were also breakout panels on a wide range of topics, including Fresh Produce Safety-learning from Foodborne Illness Outbreaks, and Barriers to Benefits.
Thousands Take Savings Pledge During America and Military Saves Week
Over 30 thousand savers “took the pledge” to save in the year ahead during the 2019 America Saves Week and Military Saves Week February 25-March 2. More than 1,700 organizations, including 339 bank and credit unions, helped Americans to save a total of $36,513,600. The top savings goals this year were: Emergency Fund, Vacation/Special Event, Education, and Debt Repayment.
“Over 30 organizations including six federal agencies led the planning of America and Military Saves Week 2019 with great success. Saving is the cornerstone of financial capability and stability, we are thrilled that so many organizations realize the importance of encouraging their people to save more effectively,” said America Saves Director George Barany.
Media coverage was also substantial, with 705 media hits, including an article by syndicated personal finance writer, Michelle Singletary. The article about the importance of saving was published in the Washington Post, the Boston Globe, and dozens of other newspapers, with a combined circulation of around 117 million people.
This year’s success was partially driven by the increasingly important use of social media. On Twitter, over eight million potential users were reached with messages from nearly 3,000 contributors. Through the work of partners and local campaigns across the nation, the 2019 America Saves Week Military Saves Week was a big success, Barany said.