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Clayton: SEC Broker Conduct Rule Embodies ‘Core Fiduciary Principles’

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The Securities and Exchange Commission’s newly released Regulation Best Interest proposal for brokers embodies “core fiduciary principles,” the agency’s chairman, Jay Clayton, told a House Appropriations Subcommittee on Thursday.

Rep. Tom Graves, R-Ga., chairman of the Subcommittee on Financial Services and General Government, asked Clayton to provide an update on “what we once knew as the fiduciary rule, but is now being re-discussed as the best-interest proposal.”

Clayton explained that the duty an advisor or broker-dealer should owe to the client “should match that client’s expectations,” and that the client also “ought to be able to understand that duty.”

That relationship, Clayton continued, “should be governed by fiduciary principles.”

While the agency has called its new proposed rule for brokers “the best-interest standard,” Clayton said, “I want to be clear: For broker-dealers, there are core fiduciary principles embodied in that best-interest standard. In fact, those fiduciary principles, I believe, are the same as the fiduciary principles that are embodied in the investment advisor standard.”

What has the agency done in its proposal? Clayton asked rhetorically.

“We’ve recognized that the relationship between and investment advisor and their client is a different type of relationship than a broker-dealer and their client. But we’ve sought to harmonize the actual duties that are owed recognizing those differences.”

Clayton went on to explain in his testimony that under the proposed Regulation Best Interest, a broker-dealer, when making a recommendation of a securities transaction or investment strategy to a retail customer, “will be required to act in the best interest of that customer at the time the recommendation is made, including the broker-dealer being prohibited from placing their financial or other interest ahead of the interest of the retail customer.”

To add clarity for all participants, he continued, “the proposal provides that the best-interest duty is discharged if the broker-dealer complies with a disclosure obligation, a care obligation and two conflict of interest obligations.”

Under current standards, by contrast, “broker-dealers are permitted to recommend to their retail customer a product that is suitable but worse for the customer than another product that the broker-dealer offers — because the first product makes the broker-dealer more money,” Clayton said.

“Let me be clear: Our proposed Regulation Best Interest would address this concern.”

Clayton said that he urged commenters to review the rule proposal “thoroughly, and then engage with us on it — through comment letters, one of the investor roundtables,” which he said will take place in Atlanta, Denver, Houston and Miami, or in meetings with the agency.

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