On April 18, the Securities and Exchange Commission released its
much-anticipated "fiduciary" rule proposal, "designed
to enhance the quality and transparency of investors' relationships with
investment advisers and broker-dealers while preserving access to a variety of
types of relationships and investment products."
The realities of the rulemaking process, substantive aspects of the
proposal and surprisingly negative comments from most of the commissioners all
suggest that the proposal will face a long and arduous journey forward.
The path to implementation of the SEC advice rule starts with a 90-day
public comment period ending in late July. Following that, the SEC will
evaluate the comments, make refinements (if not wholesale changes) and release
a revised version that will almost certainly undergo at least one additional
round of comments and subsequent revisions. If the DOL fiduciary rule's past is
prologue for the future of the SEC's rule, court challenges could prolong the
Under a fast-track scenario of only two rounds of public comments and no
court challenges, a rule could conceivably be finalized by the end of 2019.
There would almost certainly be a transition period of at least one year before
the rule would become effective, thereby stretching the schedule into 2020 —
and that's the best-case scenario.
The centerpiece of the proposal is a new Regulation Best Interest rule.
The headline for this part is that the long-contemplated notion of an SEC
uniform fiduciary rule didn't materialize. The new standard is not fiduciary
and isn't uniform; arguably, it isn't even best interest in the classic sense.
ERISA and the Advisers Act of 1940 frame "best interest" in a
fiduciary context grounded in well-established common law. The SEC's new
version of "best interest" references
fiduciary principles, but is described as "building upon, and being
tailored to, the unique structure and characteristics of the broker-dealer
relationship with retail customers and existing regulatory obligations."
Commissioner Hester Pierce objected to the characterization of the
standard as best interest, saying: "It would be better to acknowledge that
we are proposing a suitability-plus standard and explain what we mean by the
'plus.'" Commissioner Kara Stein was more direct: "Calling it
Regulation Best Interest is not just confusing, it is in effect a form of
Regardless of the title, the rule would raise the bar for broker conduct
by placing tighter controls on conflicts of interest and requiring more
thorough vetting of the products that brokers recommend to clients. The
existing fiduciary standard for investment advisers would remain in place. The
distance between the two standards is narrowed, but the lines of demarcation
The SEC acknowledges investor confusion about differences in roles and
standards and seeks to tackle that problem through the second major rule of the
proposal, which introduces a new disclosure document, the client relationship
summary (CRS), and prohibits brokers from using a title containing the word
"advisor" or "adviser" unless they register as an
investment adviser with the SEC.
Form CRS is to be a brief (no more than four-page) disclosure document
used by brokers, advisers and dually registered persons to describe the nature
of the client relationship, the applicable standard of conduct, costs and forms
of compensation inherent to the relationship and material conflicts of
interest, among other things.
Unfortunately, the new form CRS doesn't cut through the confusion.
Rather than differentiating the sales orientation of brokerage activities from
the investment adviser's obligation to provide objective advice, Form CRS tries
to parse the degrees of advice involved in each type of client relationship.
This skirts the fundamental reason why different standards exist and obscures
how investor protections differ under each.
Ironically, the 5th Circuit Court of Appeals
decision to vacate the Labor Department's fiduciary rule was focused
on the differences between sales and advice, and laced with criticism of the
DOL for improperly dragging brokerage and insurance salespeople under a
fiduciary standard. It even noted that if salespeople misrepresent themselves
as advisers, title regulation would be a preferred course of action. The title
protection part of the SEC's proposal attempts to do just that; however, in its
current form, the proposal allows dual registrants to call themselves advisers
even in circumstances when they are providing only brokerage services. That's a
loophole that will need to be closed.
Ultimately, the SEC proposal has the potential to "enhance the
quality and transparency of investors' relationships with investment advisers
and broker-dealers" as it was designed to do, but it will take enormous
time and effort to get there. In the words of Commissioner Robert Jackson Jr.,
"the problems with the proposal are too many to list."
As regulatory standards rise and fall, the high ground of fiduciary
conduct is the safest place for advisers to be. Once there, there is no reason
to turn back.