After an almost decade-long wait from the SEC, the commission moved forward rule changes that would expand regulatory responsibilities for brokers to act in the “best interest” of clients when providing investment advice. In addition to the passage of the Regulation Best Interest, the SEC voted in a new client resolution summary (CRS) form, changes to the RIA standard of conduct rules and further clarification of what is “solely incidental” investment advice.
While the rules appear to be a step forward for the SEC, the vote was not unanimous. Detractors, including Commissioner Robert Jackson, argue the new rules add to consumer confusion and do not meet the intended goals of clarifying the difference between broker advice and advice from a fiduciary investment advisor.
SEC Chairman Jay Clayton defended the rule in his opening remarks during the June 5 meeting, arguing that these changes improve consumer protections and make it easier for the SEC to call out bad behavior by those providing investment advice. Still, Clayton acknowledged that the rule changes did not intend to make a consistent rule across brokers and investment advisors. Instead, he noted that while the best interest rules were informed from the fundamentals of fiduciary conduct rules it was not a fiduciary standard.
In the end, the “best interest” expansion to brokers should impact behavior to some degree as the fact sheet passed out by the SEC stated that the new rules would prohibit certain types of conflicted compensation arrangements such as sales competitions and awards for selling particular investments during a set timeframe. While the rule did not ban all forms of conflicted compensation, it did cut back on it.
Perhaps the biggest knock against the new rules was that the SEC declined to define “best interest” specifically. Instead, the regulator left a lot of wiggle room for interpretation. While brokers need to avoid certain conflicts, provide disclosures and put client goals ahead of their own financial goals, it is not clear this moved the needle much from the current suitability standard which requires much of the same.
Additionally, a big difference between the SEC rule and the Department of Labor’s fiduciary rule is that the SEC rule does not have the teeth or enforcement strength of the DoL regulation. The Labor Department rule required brokers engaging in conflicted compensation models and selling certain products to act in the best interest of clients, and also required them to a sign a best interest contract. This contract and the possibility of class action lawsuits presented a real way to enforce the fiduciary rule. However, the SEC’s Reg BI might be harder to enforce.
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Consumer advocates may turn to state regulators in hopes they’ll pass more stringent rules.
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The new rule package will require firms to take a hard look at their compliance programs.
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Concerns arose when the SEC first proposed its package of regulations. Instead of addressing these worries, the agency just codified them.
June 5
The CRS form would aim to provide new disclosures to clients at the start of a relationship where investment advice will be provided. The two concerns with such a form are that it is not clear how well disclosure forms work and some registered investment advisors have had issues with the form as it required language stating that brokers can also provide investment advice according to the SEC. Essentially, this might actually make it harder for consumers to distinguish between broker and investment advisor advice because the form states that both can provide it.
There’s more to come. The Labor Department has indicated it will likely roll out something related to the fiduciary rule later in the year. It could serve as a prohibited transaction exemption to align the department’s fiduciary rule with the new best interest standard. The SEC said their rule applied to rollovers and IRAs, so this could also tread a bit on the Labor Department’s regulatory ground.
Advisors will need to look out for changes to forms, compensation and disclosures over the next year. For brokers, this might give you a better marketing stance with regard to clients; you can legally state that you will be following the best interest standard for all advice. For those that already act as registered investment advisors, a bit of frustration might be expected because clarity between broker and advisor was lost. This means finding the best way to express your value to clients, and the importance of fiduciary language will become even more crucial.
