The SEC officially entered the fiduciary standard fray with the release of its much-anticipated fiduciary /best interest proposal April 18. The three-part proposal is likely to be controversial in several respects, as contrasts with the DOL’s hapless Fiduciary Rule are inevitable. Unlike the DOL’s version, the SEC’s version applies to both retirement and non-retirement accounts and focuses on the disclosure and mitigation of conflicts of interest more than elimination of them. Further, the SEC’s proposal does not create any new private right of action or right of rescission, whereas the DOL’s version famously leveraged legal means as a method of enforcement.
The SEC’s proposal uses best interest language when imposing duties on BDs, but narrowly defines obligations for compliance; it does not create a fiduciary standard for BDs, as the term is commonly understood, nor does it impose the same standard of duty on BDs as on advisers. The SEC’s version restricts standalone BDs and their representatives from using the terms “adviser” and “advisor” in their titles, leaving these sobriquets to the exclusive purview of registered investment advisers; the use of “planner,” “financial planner” and other often conflated terms still appear to be an open question. Fiduciary obligations of advisers are clarified in the SEC’s proposal, including the admonishment that advice regarding retirement account rollovers must be in the best interest of the client, as in the DOL’s version.
Faux fiduciary standard or reasonable compromise? Although voting to release the proposal, SEC Commissioner Hester Pierce declined to call it a fiduciary standard for brokers, referring to it instead as a “suitability plus” standard, while Commissioner Kara Stein voted against its release, referring to it as “Regulation Status Quo”. With the DOL’s efforts mired in litigation following the Fifth Circuit Court of Appeals’ March decision to vacate the Rule, the SEC’s proposal may be fiduciary standard proponents’ best chance for any progress.
The SEC’s Standards of Conduct for Investment Professionals Rulemaking Package consists of the following:
- Regulation Best Interest: imposes a duty on BDs to act in the best interests of retail customers at the time recommendations are made, without putting the financial or other interest of the BD ahead of the customer, by complying with the three following obligations:
- Disclosure: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.
- Care: exercise reasonable diligence, care, skill and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
- Conflict of interest: establish, maintain and enforce policies and procedures reasonably designed to identify and then, at a minimum, to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.
- Investment Adviser Interpretation: reaffirms and clarifies certain aspects of the fiduciary duty that an investment adviser owes to its clients.
- Form CRS-Relationship Summary: a standardized, short-form disclosure required of advisers, BDs, and the financial professionals that work for them, that highlights key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.
The Commission will seek public comment on the proposed rules for 90 days to permit retail investors and other interested parties the opportunity to review the 1000+ page proposal and submit comments, after which time they will consider the comments and publish a final rule.