Wednesday afternoon, a five-person Securities and Exchange Commission panel voted four to one to move forward on a proposal package that would establish a best interest standard for broker/dealers and restrict brokers from using the titles “advisor” or “adviser,” as well as implement a mandatory disclosure document, Form CRS, summarizing investment advisors’ and brokers’ relationships with clients.
Most in the industry seem to be taking the news with a grain of salt and a healthy dose of skepticism. The commissioners themselves were reluctant to push it through.
Massachusetts Secretary of the Commonwealth William F. Galvin expressed his disappointment that the proposal doesn’t take things far enough in a statement earlier today:
“The SEC is proposing a watered-down standard that simply restates current industry rules and allows certain dangerous conflicts to persist. Among other problems, the rules do not prohibit conflicted actions and will provide support for recommendations of high-cost and proprietary investment products, where conflicts have been particularly harmful to retail investors.”
Duane Thompson, a senior policy analyst at Fi360 agrees, noting:
“The release of a thousand-page package by the SEC in lieu of a uniform fiduciary standard applicable to investment advice by brokers and investment advisers is very disappointing but not a surprise given earlier reports that the Commission was leaning toward a ‘suitability-plus’ standard for the brokerage industry. However, the premise that business models should drive market conduct standards, rather than fiduciary accountability in a relationship based on trust and confidence for identical advisory services, is flawed. Moreover, the limited restriction on use of ‘advisor’ and ‘adviser’ titles only to fiduciaries falls short by allowing the use of other titles, such as ‘wealth manager’ and ‘financial planner,’ to be available for non-fiduciary advice.”
MarketCounsel also expressed its displeasure, albeit because it doesn’t think the proposed actions are necessary, effective or both:
“MarketCounsel has long held the opinion that b/ds will never be held to a fiduciary standard. Reg BI would place a ‘best interest’ standard of conduct on b/ds, but this does not rise to the level of a fiduciary duty. MarketCounsel believes that while this new best interest standard gives some additional protection to retail investors, it does nothing to resolve the confusion that retail investors have over b/d and RIA standards of care. In fact, it will most definitely result in more confusion. The one positive aspect of Reg BI for RIAs is that b/ds and their representatives will no longer be able to call themselves ‘advisors’ or ‘advisers.’
MarketCounsel believes that Form CRS is just another document that clients won’t read or understand. “Form CRS will be overly burdensome, redundant and of marginal value to clients, especially considering an RIA’s requirement to deliver Form ADV which includes much of the same information proposed by Form CRS.”
Others, like Scott M. Freund, president at Family Office Research in Bethesda, Md., took a more measured, glass-half-full approach, simply happy that things are moving forward.
“To me, 90 percent of life is managing expectations,” Freund said. “So any proposal that helps the end buyer, in this case the investing public, better understand what they are getting into, is likely a worthy proposal to consider. For those with nothing to hide, which includes honest brokers of commissioned products that add value to an investor, it should be a non-issue. It’s time for the others to find a new game to play.”
Paul C. Spitzer, founding member at Advanced Practice Advisors in La Quinta, Calif., has little confidence that the proposals will become the law of the land, noting: “Maybe this is a little cynical after 35 years in the biz, but my guess is the b/d lobby will kill this proposal hook, line and sinker. So far they are batting 1.000, I expect this to have the same outcome.”
NextCapital Co-founder Rob Foregger believes that the proposal is a step in the right direction and that the 90-day comment period will play an important role in shaving down some of the rough edges:
“I agree with Commissioner Jackson's concern that the final rule needs to further ring out ambiguity as to what is, or is not, acceptable broker behavior. Under the current proposed rule, a broker would be able to hold themselves out as "operating in the clients best interest", without being held to a fiduciary standard of care-- this is problematic and needs significant work,” Foregger said. “The process is very messy, and there is a lot of hard work that needs to happen to make this proposal effective regulation. The next 90-day comment period is critical to getting this right.”
Some, however, like Brendan McGarry of the law firm Kaufman Dolowich & Voluck in Chicago, think there’s simply too much work to be done.
“Based on the commissioners’ comments, the proposed 90-day comment period may not be long enough to facilitate generation, submission and consideration of the number of comments likely to be submitted for the 1,000 page rule.”
