20 May 2018

SEC Proposes Regulation Best Interest

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The Securities and Exchange Commission (SEC) proposed new rules for financial advisors and broker-dealers, a best interest standard that would essentially replace the fiduciary rule.

The fiduciary rule, proposed two years ago by the Department of Labor at the request of Congress, says financial advisers must serve as fiduciaries for clients, a higher standard than the previous suitability standard, which said that as long as the recommendation met a client’s need, it was suitable. With the new standard, investments must be in clients’ best interest, not just suitable.

Last fall, the rule was quite controversial and full implementation was delayed from the original date of Jan. 1, 2018, to July 1, 2019, to give the public a chance to submit comments.

The new proposed rule is designed to enhance transparency while preserving access to a variety of types of advice relationships and investment products.

Under the SEC’s proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy. It is designed 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. It does not, however, state that investment advisors are fiduciaries, which is a higher standard that makes advisors legally bound to act in customers’ best interest.

The SEC’s Board of Commissioners approved Regulation Best Interest by a vote of 4-1 with Kara Stein opposed.

Regulation Best Interest also clarifies the commission’s views of the fiduciary duty that investment advisers owe to their clients. Customers would sign a disclosure document that summarizes the relationship with the advisor. Further, certain broker-dealers and their financial professionals would be prohibited from using the terms “adviser” or “advisor” as part of their name or title with retail investors.

“The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct. Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost. The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors,” SEC Chairman jay Clayton said.

The proposal will be open to public comment for 90 days after publication in the Federal Register.

Stein voted against it, saying the proposed regulation protects the broker-dealer from liability or penalty.

“It protects the broker-dealer, not the customer,” Stein said. “To state it differently, does this proposal require financial professionals to put their customers’ interests first, and fully and fairly disclose any conflicting interests? No. Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries? No. Does this proposal require financial professionals to provide retail customers with the best available options? No.”

The Investment Company Institute, however, applauded the measure.

“ICI commends Chairman Clayton for leading the Commission’s efforts to address standards of conduct for financial intermediaries. We have long advocated for the SEC to take the lead in this area and welcome the Commission’s action. We look forward to commenting in detail once we have reviewed the package in its entirety. Furthermore, ICI pledges to work with the Commission as it completes the rulemaking process, to ensure that retail investors are protected by a high standard of conduct when they receive recommendations from financial intermediaries, regardless of whether they are investing for retirement or other important financial goals,” ICI President and CEO Paul Schott Steven said.

Click here for the original article from Financial Regulation News.

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