A little over a year ago, the Securities and Exchange Commission issued 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. Now, the issue has come to a head, with the agency set to vote on the package on June 5, according to its website.
The SEC commissioners will vote on four items: Regulation Best Interest (Reg BI), which would set a standard of conduct for broker/dealers; the Form CRS, the relationship summary; a standard of conduct for investment advisors; and an interpretation of “solely incidental,” a prong of the Investment Advisers Act of 1940.
The final item was not addressed in the original package, and would cover the interpretation of a section of the Investment Advisers Act that exempts brokers from registering as investment advisors if the “performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.”
Reg BI is meant to ensure advisors and brokers act in the “best interest” of clients, even as it allows for “conflicted” business models (incentives to brokers to sell certain financial products) to exist, as long as those conflicts are disclosed and mitigated. The SEC’s move, mandated by Congress, comes after the Department of Labor’s fiduciary rule for advisors to retirement accounts—which went further in assuring a best interest standard—did not survive a court challenge. Yet, the DOL recently said it would revisit the rule in December of this year.
Since the SEC introduced the proposal, the agency has conducted several investor roundtables across the country and collected some 6,000 comment letters. Staff has been reviewing it all as it develops final recommendations.
Industry groups and investor advocates have been calling for rigorous testing of the Customer Relationship Summary, a disclosure document that’s part of the proposal. The SEC’s Office of the Investor Advocate released a research report late last year, in conjunction with the RAND Corporation, testing investors’ use of the four-page mockup form.
The rule proposal has been met with both skepticism and praise. The SEC’s Investor Advisory committee recommended the agency make it explicit Reg BI is a fiduciary standard, consistent in principle for brokers and investment advisors alike. However, SEC Chair Jay Clayton has said in the past that the agency avoided using the term on purpose. It remains to be seen whether the SEC implements the committee’s recommendations.
Trade groups representing the brokerage industry have supported the SEC’s efforts, arguing it is the appropriate agency to create a standard of conduct for the securities industry, not the DOL or state governments. The standard is imperfect, however.
Several states, including Nevada and New Jersey, have decided to take up the fiduciary banner themselves.
