SEC Broker Conduct Plan Is Not a Fiduciary Standard

While industry officials were busy Thursday combing through the more than 1,000-page standard of conduct rule package approved Wednesday by the Securities and Exchange Commission, initial consensus is that the agency’s once-promised uniform fiduciary standard for brokers and advisors has morphed into a “suitability plus” standard for brokers and what could likely result in a more onerous fiduciary process for registered investment advisors.

The package, “in lieu of a uniform fiduciary standard applicable to investment advice by brokers and investment advisors, is very disappointing, but not a surprise given earlier reports that the Commission was leaning toward a ‘suitability-plus’ standard for the brokerage industry,” said Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company.

Fi360’s “immediate reaction,” Thompson said, “leaves us in full agreement with Commissioner [Kara] Stein’s comments during the open meeting yesterday that the SEC squandered a golden opportunity to act in the best interest of investors.”

The rulemaking package, consisting of three parts, “is going to take time to properly digest,” Larry Stadulis, a partner at Stradley Ronon in Washington, told ThinkAdvisor on Thursday.

“The proposals do not seek to impose ‘uniform’ conduct standards on advisors and brokers,” Stadulis said.

“The best-interest standard that the SEC seems to impose on brokers under Regulation Best Interest is not a fiduciary standard.”

‘Confusing Conduct Standard’

Massachusetts Securities Regulator William Galvin stated that the SEC rule “appears to be drafted to appease the broker-dealer industry and their lobbyists, protecting the industry’s best interests instead of the best interests of investors.”

“Recommendations to retail investors should be made pursuant to a true and clear best-interest fiduciary standard,” Galvin stated, adding that “that standard was reflected in the Department of Labor’s Fiduciary rule.”

Instead of supporting Labor, “the SEC provided a confusing conduct standard that is sorely inadequate to protect retail investors,” Galvin added. “While the rules use terminology such as ‘fiduciary duty’ and ‘best interest,’ the substance of the rules falls far short.”

Elliot Weissbluth, CEO of RIA consolidator HighTower, stated that “while it’s commendable that the SEC is making an effort to address this [fiduciary] problem, a 1,000-page proposal is a disheartening outcome.”

Establishing a fiduciary duty “for financial advisors should not be this complicated: Either you are putting the client’s best interests first, or you are not,” Weissbluth added. “Creating ambiguity is just an excuse to avoid putting the client’s interest first.”

Barbara Roper, director of investor protection for the Consumer Federation of America, told ThinkAdvisor that while the Regulation Best Interest proposal “offers a modest improvement over the status quo” for brokers, it “falls far short of the clear and unambiguous best-interest standard that investors need and expect.”

The “biggest problem” with the Regulation Best Interest proposal, Roper continued, “is that it doesn’t clearly define best interest, which is going to make it difficult if not impossible to implement and enforce effectively.”

Added Roper: “Having argued that an SEC rulemaking was needed to provide uniformity, brokers have lobbied for and gotten an inconsistent standard for brokers and advisors.”

Because the term “best interest” is not defined, added Galvin, “this ambiguity will lay the groundwork for the same debates and litigation that exist today under the ‘suitability’ standard that applies to broker-dealers.”

As the SEC explains, under the proposed Regulation Best Interest — which is 407 pages long — a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. “Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations,” the SEC states.

Rob Foregger, co-founder of digital advice firms NextCapital and Personal Capital, stated that the Regulation Best Interest proposal needs “significant work.” Under the 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.”

The 90-day comment period on the three-pronged plan “is critical to getting this right,” 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.”

Karen Barr, president and CEO of the Investment Adviser Association, added that “because the Regulation Best Interest standard, as proposed, is not clear — and the SEC noted that it wasn’t the same as fiduciary duty — the fiduciary standard still appears to be the broader and more stringent standard.”