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.
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