The largest trade groups in the investment advice industry met with the Securities and Exchange Commission's Investor Advisory Committee on Thursday in Atlanta to discuss new rules proposed by the regulator. The groups, which represent thousands of financial advice professionals, lauded the SEC’s efforts to try and eliminate confusion for investors—but some raised concerns over the structure and language of the reform.
At a meeting at Georgia State University on the regulator’s proposed Regulation Best Interest, which would place a mandate on brokers to put their clients’ interests ahead of their own, discussion fell on how the standard would be applied and what disclosure mechanisms would be required from brokers and advisors.
In a statement prepared ahead of the meeting, SEC Chairman Jay Clayton said “the broker-dealer standards of conduct for both care and loyalty should be set to a level investors would expect. This is why we proposed to incorporate the essential element from fiduciary standards—that you cannot put your interest ahead of your client’s—into the standard applicable to broker-dealers.”
Karen Barr, the president and CEO of the Investment Adviser Association (IAA), representing more than 650 SEC-registered investment advisory firms that manage an aggregate of more than $20 trillion in assets, said her group was the concerned that the proposed SEC standard does not appear to apply when a broker provides ongoing advice, even in the case of ongoing monitoring of investments, she said. It only seemed to apply at the time of a specific recommendation.
Most clients communicate with their broker only a few times per year—and may make only make changes to portfolios in response to markets.
“We are concerned that this may constitute a gap in the standard of conduct,” Barr said.
The SEC also presented Customer Relationship Summary forms, or the disclosure forms being considered to comply with the new standards, for participants to critique with the committee. Susan Kleimann, the founder and president of Kleimann Communication Group, a disclosure-form design firm, said the three samples the regulator put out were “cursed.”
However, she spoke positively about the discussion overall because she felt the SEC committee members recognized the samples were "rough drafts."
“What I’m optimistic about is that they open to saying that and open to the idea that they will have to test whatever they come up with next with consumers and the design consumers,” Kleimann said.
Dale Brown, the president and CEO of the Financial Services Institute (FSI), whose members include independent broker-dealers and registered investor advisory firms, said his organization supports what is called “two-tier disclosure,” so that investors aren’t deterred from working with an advisor.
The first tier would require firms to present a limited amount of information at the time an investor becomes a client. The second tier of disclosure would be available upon an investor’s request and include more detailed information on an advisor’s compensation and how the advisor and their firm are paid based on the products they invest client money in.
“More disclosure does not result in better disclosure,” Brown said.
