SEC Proposes New Broker-Dealer Rules to Depose DOL Fiduciary Standards
April 20, 2018 by Frank Klimko
WASHINGTON – The U.S. Securities and Exchange Commission released a proposed package of new rules for brokers, dealers and investment advisers to overhaul conflict-of-interest standards and supplant the suspended Department of Labor’s fiduciary rule that was widely criticized by the retirement industry.
The panel voted 4-1 to release the package, which included the new Regulation Best Interest standard, a new short-form disclosure document and a new restriction on broker-dealers over use of terms “adviser” or “advisor.”
“We can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct,” SEC Chairman Jay Clayton said in a statement. “Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.”
Industry representatives, including American Council of Life Insurers President and Chief Executive Officer Dirk Kempthorne, reacted positively. Specifically, the ACLI was supportive of the new universal best interest standard.
“We are encouraged by the SEC proposal to implement a best interest standard of conduct that can be uniformly applied across all regulatory platforms — the states, FINRA, and the Department of Labor,” Kempthorne said in a statement.
Insured Retirement Institute Senior Vice President and General Counsel Lee Covington agreed.
“IRI has long supported the adoption of a best interest standard that preserves access to affordable financial advice and a wide variety of lifetime income products,” Covington said in a statement.
The SEC released the new standards partly because of the ongoing uncertainty over the status of the DOL fiduciary rule, Clayton said.
Last month, the U.S. Fifth Circuit Court of Appeals in New Orleans invalidated the fiduciary rule, declaring the DOL acted in an arbitrary and capricious fashion that exceeded the agency’s authority under the federal Administrative Procedure Act. The Trump administration has not signaled whether it will appeal that ruling (Best’s News Service, March 26, 2018).
And, the new SEC rules are designed to be less burdensome and costly than the DOL version, Clayton said. For example, the SEC rules do not replicate the DOL’s Best Interest Contract Exemption, which required fiduciaries using the BIC exemption to agree to be sued for breach of contract related to the best interest standards.
“The marquee ‘Regulation Best Interest’ standard of conduct for broker-dealers and investment advisers is primarily about disclosure, and falls short of unleashing enforcement via the courts as did the DOL rule,” Charles Gabriel, president of Capital Alpha, said in a research note. “This suggests an intent to be mindful of disruption, if not minimally disruptive.”
“The positive net to which the policy ‘puck’ could nevertheless be heading is made clear when comparing the proposals as an alternative to the far-more-onerous (original) DOL fiduciary rule,” he said.
However, the SEC rules share some elements with the defunct DOL standard. For example, brokers-dealers would still be required to act in the best interest of their clients. Broker-dealers would have to comply with disclosure-care obligations and new conflict of interest requirements, Clayton said.
For disclosure, brokers-dealers would have to reveal to the customer the facts relating to their proposed relationship, including conflicts of interest. Under the care provision, they would have to exercise diligence on the risks associated with a recommendation, which must have some reasonable basis. On conflicts of interest broker-dealers would have to maintain formal-written procedures to disclose such conflicts and eliminate them.
“This regulation prohibits BDs (broker-dealers) from putting their interests ahead of their customers’ interests,” Clayton said. “It means that BDs must do more than simply disclose their conflicts of interest. Certain inherently risky sales practices such as contests, trips and prizes will merit scrutiny in this analysis.”
The SEC also proposed a new disclosure form, the customer/client Relationship Summary. The four-page client disclosure form would require dealers, advisers and brokers to disclose fees, conflicts of interest and whether they provide ongoing services.
Lastly, the commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. They would also need to disclose their registration status with the commission in certain retail investor communications, the SEC said.
Commissioner Kara Stein, a Democrat, voted against releasing the new rules, saying they fell short of real consumer protections.
“This package purports to establish a standard of conduct. Specifically, it purports to reform the way financial professionals interact with their retail clients, and to introduce new rules for financial professionals when they give advice,” Stein said in a statement. “However, despite the hype, (the) proposals fail to provide comprehensive reform or adequately enhance existing rules. In fact, one might say, the emperor has no clothes.”
The new rules will be open for public comment for 90 days once they are published in the Federal Register. After the comment period closes, the SEC will schedule a vote to formally adopt the measures.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
