An SEC advisory committee asked the commission to set new rules that would explicitly codify a requirement that advisors follow a fiduciary standard — a guideline that the commission’s chairman assiduously tried to avoid.
A majority of the Investor Advisory Committee voted Wednesday to adopt four recommendations that backers say will strengthen the proposed Regulation Best Interest, along with a new disclosure document.
In calling for the SEC to codify the new standard, the committee has steered the SEC down a path that SEC Chairman Jay Clayton hoped to avoid. Clayton
Barbara Roper, director of investor protection at the Consumer Federation of America and the architect of the committee's recommendation, explained that the panel is taking an incremental approach with its proposal to enhance what she said was a solid foundation that the SEC had established.
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"The recommendation recognizes that Reg BI is intended to raise the standard of conduct that applies when brokers provide investment advice, and our recommendation is intended to build on and strengthen the proposal that the commission has put forward, not send the commission down a different path," Roper, director of investor protection at the Consumer Federation of America, said during a committee teleconference. "So these are recommendations to enhance the proposal, not substitute a different approach."
By a vote of 16-3, the committee ratified the proposal, which the SEC will consider as it works to finalize the rule next year. A few members who voted with the majority criticized parts of the recommendation.
Clayton did not address the substance of the committee's recommendations at the meeting, but noted the intense interest that the best interest regulation has drawn from the public, with about 3,000 unique comment letters addressed to the commission since June, and more than 6,000 altogether.
The committee also recommended that the SEC clarify what it means by a "best interest" standard of advice that would impose broad fiduciary principles for brokers and advisors alike. The aim is to allow some flexibility in how firms with different practice structures would have to comply with the regulation.
"It recognizes that there isn't one broker-dealer business model and one investment advisor business model," Roper said.
"There are a range of broker-dealer business models and a range of investment advisor business models, and pinpointing the point at which you cross from one regulatory regime into the other is extremely difficult, and impossible for the typical investor," Roper added.
With its vote, the committee called on the SEC "to adopt an approach in the standard that is uniform in principle for broker-dealers and investment advisors, but where the specific obligations that flow from that duty follow the contours of that relationship."
Under that framework, compliance would be measured by whether the advisor or broker made recommendations that they "reasonably believe represent the best available options for the investor," based on a careful analysis of the client's needs and goals. To allow for the varied relationships between advisor and client, a professional’s obligations to a goals-based, planning-oriented account could differ from those that guide a broker who may simply offer a recommendation on a target-date fund.
The committee acknowledges that its circumstances-dependent approach is akin — but not identical — to the FINRA suitability standard, generally understood as less rigorous than a full-fledged fiduciary duty.
"A key difference is that the best interest standard, in contrast with the suitability standard, would not be satisfied by recommending any of what may be many suitable options," the committee says in its
In addition to the clarification of best interest advice and the inclusion of the term "fiduciary," the committee asked the SEC to extend its proposed regulation to rollover recommendations and to dual registrants to determine which side of the practice should service an account.
The committee also called on the SEC to conduct more testing on the proposed disclosure document known as Form CRS — customer relationship summary — to determine whether average investors understand the most important facts of the relationship and their advisor's responsibilities.
The SEC has commissioned the Rand Corp. to conduct testing on the matter, and
