Among the more controversial efforts undertaken by the Securities and Exchange Commission this year was its pursuit of the new Regulation Best Interest—also known as, with greater brevity, Reg. BI.

On Monday, Chairman Jay Clayton, speaking to an audience of financial professionals in Boston, vigorously defended the rule package and came out swinging against critics.

“Without question, these actions, individually and collectively, will significantly benefit Main Street investors,” he said. “Since we adopted our rulemaking package, there has been no shortage of views expressed, both from those in support of our efforts and from those who would have preferred a different approach. Some of this commentary has, in my view, shown a lack of understanding of the law and legal obligations of financial professionals, both before and after adoption of our rulemaking package.”

Regulation Best Interest, in broad strokes, enhances the standards of conduct for broker-dealers. It imposes new standards of conduct that substantially enhance their obligations beyond the current “suitability” requirements and establishes a general obligation that draws from key fiduciary principles. These include requiring broker-dealers to act in the best interest of their retail customers and not place their own interest ahead of the retail customer’s interest.

Investment advisers and broker-dealers are also required by the rule to deliver a short, plain-language relationship summary to retail investors at the beginning of a relationship. It summarizes in one place—on two pages—specific information about services, costs, conflicts of interest, and whether or not the firm and its financial professionals have a legal or disciplinary history. The disclosures will have a standardized question-and-answer format to ensure comparability across firms.

Clayton argued that much of the criticism the rulemaking package has received is “false, misleading, misguided, and unfortunately, in some cases, is simply policy preferences disguised as legal critiques.” He tackled common critiques topic-by-topic.

Claim: The standard of conduct will not do enough to protect retail investors

Clayton outlined key features of Reg. BI that he says will enhance standards of conduct. It applies to account recommendations, including recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, as well as recommendations to take a plan distribution. These recommendations are often provided at critical moments (such as at retirement), may be irrevocable (or very costly to reverse), can involve a substantial portion of a retail investor’s net worth, and can have significant long-term impacts on the retail investor. “Accordingly, this is a critical enhancement over both existing broker-dealer obligations and our proposal,” he said of Reg. BI affirmatively requiring broker-dealers to act in the best interest of their retail customers and not place their own interests ahead of those customers’ interests.

To meet these demands, broker-dealers must show compliance with four component obligations: a disclosure obligation that requires full and fair disclosure of all material facts about the scope and terms of the relationship with the customer; a care obligation that requires brokers to exercise “reasonable diligence, care, and skill” to understand the potential risks, rewards, and costs associated with their recommendations; a conflict of interest obligation that requires firms to implement policies and procedures to mitigate (and in some cases, eliminate) incentives to make recommendations that are not in a customer’s best interest; and a compliance obligation that requires firms to implement policies and procedures reasonably designed to achieve compliance with Reg. BI as a whole.

“Some critics have gone so far as to fault Reg. BI for failing to require elimination of all conflicts of interest,” Clayton said. “This criticism is misguided—there are conflicts of interest inherent in all principal-agent relationships, and the broker-customer relationship and the investment adviser-client relationship are no exception. Reg. BI recognizes that these conflicts exist and requires that firms address those conflicts and provide recommendations that are in the best interest of their retail customers.”

Claim: Reg. BI is deficient because it does not define “best interest” and does not require a broker to recommend the “best” security

“Our view was that the best approach would be to apply the specific component obligations of Reg. BI … in a principles-based manner. Whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of how the specific components of the rule are satisfied,” Clayton said.

“Neither investment advisers nor broker-dealers are required to recommend the single ‘best’ product,” he added. “Many different options may in fact be in the retail investor’s best interest, and what is the ‘best’ product is likely only to be known in hindsight. In short, it is appropriate and symmetrical for both standards to use a principles-based approach to determine ‘best interest.’ ”

Claim: The fiduciary interpretation weakens the existing fiduciary duty that applies to investment advisers by not requiring advisers to “put clients first”

“This claim is flatly wrong,” Clayton argued. “Our interpretation in no way weakens the existing fiduciary duty; rather, it reflects how the Commission and its staff have inspected for compliance, applied and enforced the law in this area for decades.”

“In setting forth the Commission’s interpretation of an investment adviser’s fiduciary duty, we have stated what the law requires,” he added. “In our decades of administering this standard, we have never heard that the fiduciary standard is a weak legal standard, and our interpretation is firmly grounded in longstanding law in this area … Nothing in the law has changed, but for reasons that I cannot grasp, a few critics want to say it has.”

Claim: The fiduciary interpretation weakens the existing fiduciary duty that applies to investment advisers by not requiring advisers to avoid all conflicts

“There is no legal or regulatory basis for this claim,” was Clayton’s blunt response. “These critics are simply wrong.”

Claim: The standards of conduct under Regulation Best Interest can be satisfied by disclosure alone

This claim reflects “a fundamental misunderstanding” of how the independent component obligations of Reg. BI operate and a misconception of the investment adviser’s fiduciary duty, Clayton argued.

“Irrespective of whether a conflict can be addressed through disclosure or has to be mitigated or eliminated, compliance with Reg. BI does not end with broker-dealers addressing conflicts of interest,” he explained. “In all cases, the broker-dealer will also need to comply with each of the other component obligations … The fiduciary duty cannot be satisfied by disclosure alone.

Claim: Regulation Best Interest is a weak standard because it does not require broker-dealers to monitor a customer’s account or impose an ongoing duty

“This argument is fundamentally flawed,” the SEC chairman said. “Not only does it reflect a misunderstanding of how federal law applies, it disregards a fundamental goal of our rulemaking which I’ve discussed—to preserve access to different types and levels of services and related cost structures. I believe investors should be able to choose whether they want ongoing monitoring services and whether to incur the cost of those services.”

Also, imposing an ongoing monitoring obligation “would effectively prohibit brokers from providing retail customers with advice without registering as investment advisers. That would mean less access and choice, and higher costs, for retail customers,” he said.