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Regulation and Compliance > Federal Regulation > DOL

SIFMA, FSR Propose ‘Uniform Best Interests’ Standards for BDs

By James J. Green, Melanie Waddell

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Two major financial services lobbying groups, the Securities Industry and Financial Markets Association and the Financial Services Roundtable, on Wednesday announced two separate proposals to make broker-dealers put clients’ interests first.

SIFMA President and CEO Ken Bentsen said Wednesday that a “uniform best-interests-of-the-customer legal standard for broker-dealers that applies to all retail brokerage accounts” would be the best way to achieve the goal of protecting not just retirement plan investors but all investors.

Such a standard would offer a ”solution that works,” reflect what regulators have “been migrating toward” and would avoid the current atmosphere where “policymakers are headed down separate and inconsistent paths,” Bentsen said.

Among those regulators on that migratory path has been the Financial Industry Regulatory Authority, Bentsen said, which “on behalf of the [Securities and Exchange Commission] has been increasingly refining its definition of suitability under Rule 2111.”

Bentsen was speaking at a SIFMA-sponsored seminar in New York that was also webcast and that focused on the Department of Labor’s proposed fiduciary rule governing advice to retirement plan and IRA investors.

In a statement on its best interests standard, SIFMA said it “could be articulated, for example, through amendments to existing FINRA rules, as approved by the SEC,” and in a way that would be consistent “not only with SIFMA’s historical position” and with Dodd-Frank Act’s Section 913, but also with the “best interest standard set forth in the DOL [best interest contract exemption], and without certain conditions and requirements currently contained in the BIC.”

The best interest contract exemption (BIC, or BICE) is the DOL’s proposal that, in the words of the Obama administration’s Jeffrey Zients, would allow firms to “set their own compensation practices as long as they acknowledge they are fiduciaries.” However, many broker-dealer advocates have taken exception to BICE as it’s currently proposed by DOL, saying it’s complicated and confusing and would not be understood by advice givers and their firms, much less end clients.

Also on Wednesday, the Financial Services Roundtable proposed its own best interest standard. FSR’s plan creates a new prohibited transaction exemption (PTE) that is based on the investment advice exemption already allowed under the 2006 Pension Protection Act, which amended the Employee Retirement Income Security Act. The proposals come as the DOL’s fiduciary redraft is out for public comment. FINRA CEO Richard Ketchum has publicly voiced his opposition to the DOL plan, stating that the SEC should “take the lead” in crafting a best interest standard that covers all types of products.

Dennis Kelleher, president and CEO of Better Markets, told Ketchum in a Wednesday letter that his opposition to DOL’s rule is “ill-informed,” and that the DOL, not the SEC, “has longstanding congressionally mandated authority to set standards for those providing investment advice about retirement assets.”

He continued: “The DOL consulted extensively with the SEC to ensure that advisors would not face conflicting standards.”

SIFMA is also a vocal opponent of the DOL plan.

“We are headed in a direction of bifurcated rules, compliance, and disclosure regimes imposed on the same market participants from different regulators,” Bentsen said, making it “hard to see how investors won’t be confused, and the industry forced to build duplicative and redundant systems that will further affect costs.”

SIFMA said its proposed best interest legal standard would include four “core elements”:

  1. Articulate a legal and enforceable best interests obligation
  2. Consider investment-related fees as part of the best interest standard
  3. Avoid and/or manage material conflicts of interest
  4. Provide disclosures about material conflicts and investment-related fees to enhance transparency.

Moreover, Bentsen said that its proposed standard would:

  1. Apply across all investment recommendations made to individual retail customers in all brokerage accounts, not just limited to IRA or tax-deferred accounts.
  2. Serve as a benchmark for, be consistent with and integrate seamlessly into the SEC fiduciary standard that ultimately emerges under Dodd-Frank section 913.
  3. Provide substantive best interest protections for retail customers in the interim
  4. Follow the traditional securities regulatory approach of establishing a rules-based heightened standard, including a robust disclosure coupled with robust examination, oversight and enforcement by the SEC, FINRA and state securities regulators, as well as a private right of action for investors as exists today.

In his speech, Bentsen said it was “no secret that the industry has been in disagreement” with the proposed DOL rule “on a host of levels,” but that the “discussion or debate around the Department of Labor proposal is not about who is for or against the best interest standard but how” it gets implemented. SIFMA and its members “who provide multiple services,” he said, “long ago endorsed a best interest or uniform standard of care for all investors including the retirement sector when providing personalized investment advice.”

Bentsen’s remarks Wednesday echoed those of Ira Hammerman, SIFMA’s executive vice president and general counsel, during a SIFMA-sponsored event last Thursday in New York, where he and a quintet of panelists concluded that should the DOL’s proposed redefinition of fiduciary under the Employee Retirement Income Security Act be implemented, some broker-dealers will exit the retirement advice business while those who stay will face sharply increased costs. Some product manufacturers will stop issuing new ETFs, some BD reps will find themselves crossing into the fiduciary realm unawares, and there will be many more class-action lawsuits filed by clients. Kevin Carroll of SIFMA, Dean Pinto of Morgan Stanley Wealth Management, Todd Cook of JPMorgan Chase and Kenneth Crowley of UBS — attorneys all — followed Hammerman’s opening remarks by zeroing on the specifics of the DOL proposal that could have those consequences and more.

“If done improperly,” Hammerman said, the DOL rulemaking “will actually hurt investors saving for retirement and make the process that much more expensive for all concerned. With so much at stake, we want to ensure the DOL protects investor choice and doesn’t unnecessarily reduce access to education or raise costs, particularly for low- and middle-income savers.”

Hammerman began by reiterating SIFMA members’ support for a “best interest or uniform fiduciary standard of care for all retail investors, not just the retirement sector.” Specifically, he said SIFMA “supports the SEC developing a best interest standard when broker-dealers provide personalized investment advice about securities to retail investors. The clients’ best interests deserve to be put first.”

While the SEC has not yet acted on a fiduciary standard, he said that “the rules and precedents governing broker-dealer conduct with respect to retail investors, both in retirement and non-retirement accounts, have migrated toward a best interest standard.” 

As evidence of that migration, he mentioned FINRA’s “refining its definition of suitability under Rule 2111” and its  “guidance related to 401(k) rollovers under Reg Notice 13-45 to require brokers to put clients’ best interests ahead of their own. Further, investor claims in FINRA arbitration routinely include a fiduciary duty component.”

Hammerman argued that the fiduciary debate “is not if, but how we should implement such a standard,” saying it should be “consistent across the entire retail market” and “consistent with the intent of Congress” as defined in Section 913 of the Dodd-Frank Act.

But as it “digs deeper” into DOL’s “voluminous” proposal, SIFMA is “very concerned that it will actually harm the savers it intends to protect, as it appears to put forward a very prescriptive set of requirements that are extremely complex to understand and implement, likely to result in increased costs for investors, limit the ability of financial firms to provide education and make saving for retirement even harder.”

Hammerman referenced a speech May 27 by Ketchum, the FINRA CEO, in which he “outlined his goal for the broker-dealer industry to adopt a best interest standard with core elements to ensure that customers’ interests do indeed come first,” but that “the current Labor proposal is not the appropriate way to meet that goal.”

Referring to Ketchum, Hammerman said that “Rick has spent nearly his entire 40-year career as a securities regulator.  He’s expert in how markets function and how the broker-dealer model operates and serves investors. And, most importantly, he’s spent a career protecting individual investors. If he’s concerned about the DOL approach, I sincerely hope others begin to listen.”

Panelist Kevin Carroll, SIFMA’s associate general counsel, said the lobby group would file comment letters on the DOL proposal, partly focusing on the best interest contract exemption and the principal transactions exemption.

FSR’s alternative, meanwhile, crafts a new PTE that is based on the investment advice exemption already allowed under the 2006 PPA, which amended ERISA. 

A rule based on the PPA exemption, FSR says, “would still require that financial professionals and firms act in the best interest of each customer and provide appropriate disclosures without such significant disruption to customers,” as it says the DOL rule would require.

DOL’s proposed rule, FSR said, ”would substantially alter … existing PTEs and many business models, and therefore impact millions of retirement savers.”

The FSR alternative “would recognize that the fees and expenses of various investment products and services vary based on the type of product or service; thus, commissions or fees would be uniform among the same class of investment alternatives.”

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