You remember what happened when the two women came to King Solomon arguing over who was the true mother of a certain unnamed baby. Solomon, no doubt perturbed by this unwanted intrusion, picked up the remote and muted the football game.

Then, with all the wisdom of, well, Solomon, the king stood, took a sip of his Dilly Dilly Juice and decreed, as any common-sense thinking man would, “Since you both equally claim to be the mother of this infant, then I so declare you shall each share equal custody. Now someone fetch me my sword so I can split this baby as to allow each woman to retain her rightful share.”

Call it the SEC's Solomon Dilemma, but this whole “Regulation Best Interest” has all the earmarks of a split baby (see “The SEC's “Best Interest” Proposal – A Step Forward or a Set Back?” FiduciaryNews.com, September 6, 2018).

Here's what I mean: In terms of its position versus the DOL, the SEC had the advantage of moving second. It got to see the weaknesses of the DOL's fiduciary rule. This enabled it to offer an alternative that addressed these weaknesses.

That's when the SEC split the baby.

It's not like the entire proposal is bad. The idea of disallowing use of titles that look and sound like “Registered Investment Adviser” when you're not a Registered Investment Adviser should have been promulgated years ago.

It's just that the bulk of Regulation Best Interest splits the baby. It takes some of the ideas of the proponents of the DOL's fiduciary rule and some of the ideas of the opponents of the DOL's fiduciary rule and mashes them together. The result is an idea that satisfies neither party. Indeed, some would argue that it makes the situation worse.

It comes down to “splits.” The SEC is like a split interest trust. It must oversee two beneficiaries with conflicting goals.

This isn't the SEC's fault. It's the fault of the original legislation that created the SEC. The SEC is simultaneously required to increase capital markets remain liquid (i.e., make life easier for brokers) while at the same time protect the interests of investors (i.e., make like difficult for brokers).

Believe me, the SEC is honestly trying as hard as it could to make the best of a bad situation.

That being said, the SEC is partially responsible for the bad situation. It fumbled the concept of “dual registration” to the point where we have the sell-side tail wagging the buy-side dog. This just ain't natural. And the hole they dug themselves won't be easy to dig out of.

Still, since we're on the subject of splitting the baby, maybe it would be wise (perhaps not “Solomon wise”), for the SEC to, instead of splitting the baby, take baby steps.

The public is confused. It doesn't know if it's getting investment advice or being sold brokerage (or insurance) products. There's just too much overlap in the language. Addressing this first is the baby step the SEC can and should take.

Forget “best interest” or even “fiduciary” at this point. The SEC should just focus on splitting the business models, not the baby.

Instant Insights /

A problem of biblical proportions

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