A uniform fiduciary rule issued by the Securities and Exchange Commission should include a “two-tier client disclosure regime” as an alternative to the best-interest contract exemption set out in the Labor Department’s fiduciary rule, the Financial Services Institute told the securities regulator Monday.
David Bellaire, FSI’s general counsel, told the SEC in FSI’s comment letter that a two-tier client disclosure regime should consist of a “concise point-of-sale disclosure document at the time a formal engagement is entered into for new accounts that would be supplemented with more detailed disclosures posted to the financial institution’s website.”
The SEC started taking comments on the development of a fiduciary rule of its own in June.
Bellaire stated that the first-tier disclosure “will serve to inform investors of the information that is most critical to their decision making at the point in time when that information is most useful and can be delivered most efficiently.”
These disclosures, he said, would “ensure that customers understand the best interest standard of care owed to them by the financial institution and the financial advisor.”
For instance, the information provided on the first-tier disclosure may include:
• A statement of the best-interest standard of care owed by the financial institution to the client;
• The nature and scope of the business relationship between the parties, the services to be provided and the duration of the engagement;
• A general description of the nature and scope of compensation to be received by the financial institution and financial advisor.
FSI further argued in its comment letter that firms’ and advisors’ disclosure obligations should address material conflicts arising in a firm’s specific business model.
Micah Hauptman, financial services counsel for the Consumer Federation of America, told ThinkAdvisor on Monday that FSI’s proposal “relies almost exclusively on disclosure of and consent to conflicts to satisfy their preferred ‘best-interest’ standard,” which he argues is “not actually a best-interest standard.”
Rather, “a true best-interest standard ensures that advisors’ interests are aligned with their clients and that they are not encouraged and rewarded for working against their clients’ best interest,” Hauptman said. “Put differently, requiring advisors to list all the ways they may harm their clients is not the same as ensuring their incentives to harm their clients don’t exist in the first place.”
Moreover, Hauptman added, “we know disclosure alone isn’t effective at mitigating conflicts of interest. The conflicts in the broker-dealer business model often are too complex, opaque and perverse for ordinary investors to fully understand in order to make a truly informed decision.”
— Check out FSI Shares Views, Case Studies on Outside Business Activities on ThinkAdvisor.