Focus Perspective: SEC’s Proposed Fiduciary Rule

Last month we talked about the SEC’s proposed Fiduciary Rule (as compared to the DOL’s proposed Fiduciary Rule), but since the proposals do not place a fiduciary obligation on the broker-dealer, I like SEC Commissioner Hester Peirce’s reference to a “suitability-plus standard” for registered broker-dealers.

What the press has referred to as the SEC Fiduciary Rule is actually three proposals for comment:

1) A new rule, proposing a requirement for registered investment advisers and registered broker-dealers to provide a new disclosure document, a client relationship summary (Form CRS), to each retail investor, to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events. Retail investors would receive Form CRS at the beginning of a relationship with a firm, and would receive updated information following a material change at the firm.

See Proposal
2) A proposed interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act” or the “Act”). The Commission also is requesting comment on: licensing and continuing education requirements for personnel of SEC-registered investment advisers, the delivery of account statements to clients with investment advisory accounts, and financial responsibility requirements for SEC-registered investment advisers, including fidelity bonds.

See Proposal
3) A proposed new rule under the Securities Exchange Act of 1934 (“Exchange Act”) establishing a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The proposed standard of conduct is to act in the best interest of the retail customer at the time a recommendation is made without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer (“Regulation Best Interest”).

See Proposal
Michael Kitces has a summary of the three proposals, very well worth reading, at:

See Article

The comment period extends through August 7, 2018, although at least one commenter has requested an extension. The general Counsel for the Investment Adviser Association (“IAA”) has expressed concern in her comment letter that the proposed testing of the relationship summary document (Form CRS) is critical, as well as allowing commenters the opportunity to review the testing results and integrate the testing results in their comments.

The testing must be designed to determine whether investors not only found the document useful and easy to follow, but also provided them with an understanding of the information intended to be provided. “For instance, it would be important to know whether the investor understood what the term ‘fiduciary’ as used in proposed Form CRS means. Similarly, it would be important to know whether the investor understood what the term ‘disciplinary events’ may encompass. The Commission also may want to consider including alternative forms of disclosure in its investor testing to ascertain whether alternatives may be more effective in achieving increased investor understanding.”

Since these testing results of the Form CRS are critical to all of the registrants, they should be made available to the public during the comment period, and therefore reflected in comments. The comment period should be extended to allow that to happen.

See Comments

As I looked over the comments, the only major player that commented was the IAA, but I also noted that the SEC had meetings/discussions with other major players, such as: National Association of Insurance Commissioners, AXA Equitable Life Insurance Company, AIG, Primerica, AARP, Charles Schwab, Dechert LLP, SIFMA, the Institute for the Fiduciary Standard, AFSCME, and the AFL-CIO. I would expect that many, if not all, of these organizations would provide additional information to their constituents, members, and/or clients. It is also possible that they may suggest to those individuals and affiliated organizations that they provide comments to the SEC.

As I reviewed the comments on the SEC’s website, I saw some of the same concerns expressed by the SEC Commissioners: too hard, too easy, too vague, too constrictive, will only confuse investors. The only concerns that the commenters expressed that the Commissioners did not, were “it’s not my fault, the Commission is going after the wrong people, I always do what is best for the client.” The difference, of course, is that the SEC must try to cover all its bases. Without question, there are many people in our business who try to always do the best they can for their client, but there are some that don’t, and we know it.

Expressed Concerns

The Rule would not create a uniform fiduciary standard for brokers and investment advisers. The SEC says, “We are not proposing a uniform standard of conduct for broker-dealers and investment advisers in light of their different relationship types and models for providing advice.”

The intent is for brokers to act in clients’ best interest — meaning they can’t place the firm’s or their individual financial interests first. The SEC does not refer to the standard as a “fiduciary” standard.

The SEC seeks to implement its new broker standard through a combination of enhanced disclosures and obligations related to certain financial incentives (such as conflicts associated with compensation and the sale of proprietary products). As the SEC notes, though: “We do not intend for our standard to prohibit a broker-dealer from having conflicts when making a recommendation.”

Title Reform would restrict firms solely registered as broker-dealers and brokers from using the term “adviser” or “advisor” when communicating with a retail customer “in specified circumstances.”

Dually registered firms and “dual-hatted” individuals can present themselves as an “adviser” or “advisor” in name or title. Individuals can only do so if they provide investment advice to investors on behalf of the investment adviser — not if they’re merely associated with a dually registered firm but only provide brokerage services.

Advisers and brokers would be required to provide investors with a document Form CRS, no more than four pages long, summarizing their relationship with the customer. This would be in addition to existing reporting and disclosure requirements. The goal is to give investors information about the “relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events.” Advisers argue that all of this information is currently provided in Form ADV Part 2.

In the proposal, the SEC offers its interpretation of advisers’ existing fiduciary obligations and also seeks comments on three “potential enhancements to their legal obligations.” It is considering “areas where the current broker-dealer framework provides investor protections that may not have counterparts in the investment adviser context.”

“There is serious disagreement among the SEC commissioners on both sides of the political aisle about the efficacy and contents of the rule. Republican Commissioner Michael Piwowar said he had ‘some misgivings;’ Republican Hester Peirce said the rule title ‘Regulation Best Interest’ is a misnomer and that it would be more appropriate to say the SEC is proposing a ‘suitability-plus standard.’ “

“Democratic commissioners expressed similar criticisms, though in stronger terms. Kara Stein was the only commissioner to vote against releasing the proposal package, saying it was too weak and would ‘maintain the status quo.’ Robert Jackson Jr. said the proposal only ‘strengthens the suitability standard’ for brokers.”

See Article


Focus Perspective:

Let’s be honest, you are never going to satisfy everyone. And yes, sometimes the SEC overreaches and sometimes they are not tough enough. There are a lot of legitimate concerns about how investors are treated, whether they are clients or customers, and I think we all can admit that. The SEC has a tough job to do, because you are never going to please everyone!

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