SEC proposes new standard of conduct for U.S. broker-dealers

By Elizabeth Dilts

The SEC's proposal could make it even more hard for the Department of Labor to advance its embattled proposal for a new fiduciary rule governing broker-dealers, Marketwatch reported.

Last night, the Securities and Exchange Commission weighed in in a big way, dropping their version of a fiduciary standard late after a vote of 4 to 1. But even as the SEC's proposal seeks to elevate standards of care, by conferring on brokers a best-interest label, it could chip away at what had been a point of distinction for RIAs, according to Stoltmann.

What's the bottom-line?This is potentially a major change to how the SEC thinks about regulating the conduct of financial advisors. "Our consumer protection rules that require insurance and investment professionals to abide by consumer-focused standards of care should help consumers choose the professional retirement security advice that is right for them". Under the SEC rule, broker-dealers could still carry out sales contests. Terms other than "adviser", such "financial consultant", are fair game because the SEC doesn't believe retail investors would confuse them for investment advisers. The two groups are now operating along different standards. From a first read, this SEC rule appears to address some of our concerns with the regulation tool.

The SEC's rule proposal is trying to make broker-dealers put the best financial interests of their clients first. This best-interest standard applies to recommendations to buy securities, follow an investment strategy, or roll money over from a 401 (k) to an IRA. Broker-dealers are only required to sell their clients products that are "suitable' for their financial goals". Over the coming weeks, we will analyze the SEC proposal to assess the effectiveness of this approach and ways in which we might suggest improving it.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission's views of the fiduciary duty that investment advisers owe to their clients. Along with title reform, advisers and brokers would be required to provide investors with a document - no more than four pages long - summarizing their relationship with the customer.

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David Tittsworth, the former head of the Investment Adviser Association who's now counsel with Ropes & Gray in Washington, said that the proposed Form CRS "will definitely create new compliance burdens for advisory firms that deal with retail clients". "Regulation Best Interest is created to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations", the SEC states.

In the end, however, we expect this rule to have a similar effect as the Department of Labor's rule and accelerate an existing trend: advisors are moving away from a sales model and toward a relationship where they provide best-interest advice to their clients. "He said, "(The) SEC appears more willing (than the DOL was) to work with brokerage houses in crafting a rule that does not destroy their business model, create significant backlash, but still moves the industry forward towards a more fiduciary-like model". In contrast, the SEC rule relies on requiring written procedures to mitigate conflicted advice stemming from broker/dealers' misaligned financial incentives, but it is far less prescriptive than Labor's rule. "Thus, the SEC interpretive release approach may be challenged insofar as it seeks to expand the law without formal rulemaking".

The commission is accepting comments on the proposal for 90 days. At the same time, there is still a lot of uncertainty with the Department of Labor's fiduciary rule. So far, the agency hasn't said anything about whether it will appeal the ruling, but isn't enforcing the rule in the meantime.

Fi360's "immediate reaction", Thompson said, "leaves us in full agreement with Commissioner [Kara] Stein's comments during the open meeting yesterday that the SEC squandered a golden opportunity to act in the best interest of investors".

IAA's Barr added that while the proposal to restrict "the misleading use of titles is a step in the right direction", titles "are only one piece of the total context of how services are marketed".


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