Why ‘fiduciary’ was left out of the SEC proposal
May 23, 2018 by Sean Allocca
WASHINGTON — The SEC describes its new Regulation Best Interest proposal as a fiduciary standard. So why is the term not used in over 400-plus pages?
“Fiduciary can mean a lot of different things in a lot of different contexts,” says SEC Chairman Jay Clayton to a packed room of hundreds of brokers and advisors at FINRA’s annual conference.
While the proposed rule is a “fiduciary principle,” the commission refrained from using the term to make it easier for investors to understand the differences between broker-dealers and advisors, Clayton says. “Calling them both fiduciary and then defining them would not make it clear that the relationship model is different,” Clayton says.
Brokers and advisors have different “relationship models” with clients and are held to slightly different standards, Clayton says. As it stands now, brokers would create a fiduciary relationship with clients when suggesting investment vehicles, while an advisor’s duty extends to all aspects of the relationship, says Brett Redfearn, director of the SEC’s trading and markets division.
“We think that tying a broker-dealer’s duties to each recommendation — as currently understood under existing broker-dealer regulation — is important for a number of reasons,” Redfearn says. He made his comments during an earlier session at the conference.
Among other things, the proposal would help provide clarity to the recommendations, Redfearn says. It also recognizes the varying levels of advice relationships broker-dealers may have, and the differing services they may provide to retail customers. The proposed standard would also apply to account rollovers.
Either way, a professional cannot put his or her interests ahead of the investor’s, Clayton says.
Brokers or advisors will need to adequately explain their fee structures to clients, the SEC chairman says. “We should be able to have pretty candid conversations,” Clayton says. “It’s reasonable for investors to expect that it’s clear and simple — plain language.”
What will be expected of broker-dealers?
First, he or she should understand the risks and rewards associated with the recommended investment, according to Redfearn. Next, the broker-dealer must match the investment to the client’s investment profile, which the broker develops using FINRA rules. Finally, the broker-dealer must have a reasonable basis to believe that a series of recommended transactions is not excessive and is in the retail customer’s best interest.
Best Interest emphasizes what an investor would expect from his or her broker, Clayton says. While investors can’t expect guaranteed returns, they can expect reasonable communication, he says.
