While the SEC's proposal to impose a best-interest standard on broker-dealers working with retail clients may be a helpful step forward, it falls short of the true uniform fiduciary standard that some Democratic lawmakers would like to see.
SEC Chairman Jay Clayton fielded some of that criticism at a House oversight hearing, where Democrats lauded the rule's intention of addressing investor confusion, but called for a more stringent standard of conduct for brokers.
"We've known for a long time that retail investors do not distinguish between advice they get from investment advisors — who are already subject to the fiduciary rule — and sales recommendations they get from brokers, so a best interest rule for brokers was long overdue," said Rep. Carolyn Maloney (D-N.Y.).
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Fiduciary advocates lament the absence of the term from the SEC's rule, which they say fails to move beyond FINRA’s existing suitability standard, while the brokerage sector sees the proposal as a welcome jump in oversight.
June 15 -
Investment advisors and broker dealers have different “relationship models” with clients, the chairman says.
May 22 -
What should advisors expect from the upcoming regulation?
May 18
The SEC’s decision to not put forth a uniform best-interest standard for both investment advisors and brokers was disappointing, Maloney said. "A uniform standard is exactly what the SEC staff recommended after conducting a lengthy study of this issue in 2011, and I am concerned that the SEC's proposed best [interest] rule is not as strong as it should have been, and is not as strong as the Department of Labor's fiduciary rule," she said.
Maxine Waters (D-Calif.) took issue with the rule's prohibition on the use of the term "advisor" or "adviser," arguing that narrowly pinning fiduciary responsibilities to that term leaves open a galaxy of other titles that give investors the mistaken impression that the individual is acting under the highest standards of conduct.
"The proposal would only prohibit brokers from calling themselves 'advisors,' and fails to address the numerous other titles that may be used, like 'financial planner,' or 'wealth manager,'" Waters told Clayton. "Don't you agree that it would be far simpler and clearer for investors to subject any broker that holds himself out as providing investment advice or who engages in advisory services to the [Investment] Advisers Act fiduciary duty and require them to put their clients' interests first?"
Defending his approach, Clayton asserted that the business models and client relationships of investment advisors and broker-dealers are fundamentally different. He argued that distinct but comparable regulatory frameworks are appropriate. In a fee-based advisory model, clients expect a holistic service, where the advisor develops strategies to meet goals like retirement planning or paying for college, Clayton explained. In a brokerage relationship, by contrast, the client comes to the broker for specific investment recommendations on an "episodic" basis, he said.
Still, though the new regulation would not extend the advisor's explicit fiduciary duty to the brokerage space, it would effectively harmonize their regulatory expectations, he argued.
In written testimony, Clayton elaborated that the proposed Regulation Best Interest "draws from the principles underlying an investment advisor's fiduciary duty." However, some contours of the regulatory environment "will differ because the relationship types of these investment professionals differ," Clayton said.
"This is a practical necessity," he said. "But the principles are the same, and I believe the outcomes in both cases should be the same: retail investors expect high-quality advice where their investment professional is not placing their [own] interest ahead of the investor’s interest."
Moreover, Clayton emphasized the disclosure provisions of the rule package, particularly the new
"There is no conflict-free relationship. There are conflicts in investment advisor relationships and there are conflicts in a broker-dealer relationship," Clayton said. "Disclosing them, mitigating them, making sure everybody understands what the motivations are — that's what we're going to do in this space. Or I should say, that's what I want to do in this space."
The rule proposal won priase from some Republicans on the Financial Services Committee, including one of the most outspoken opponents of the DoL’s fiduciary rule.
"I'm happy to see that the SEC is finally taking the lead," said Rep. Ann Wagner (R-Missouri), who led a legislative effort to repeal the DoL rule.
To critics of the SEC's proposal, Clayton signaled he remains open to suggestions for potential revisions. He called on interested parties to share their views through the public comment process, which runs through Aug. 7, though some parties are asking for an extension.
"We have a long comment period," Clayton said. "I want to keep talking."
