SEC Chairman Jay Clayton
Photo: Andrew Harrer/Bloomberg

Since floating its three-pronged standards of conduct proposal, the Securities and Exchange Commission has received questions — even from SEC commissioners — as to why the term “fiduciary” was omitted in the agency’s Regulation Best Interest for broker-dealers.

During a Tuesday question-and-answer session at the Financial Industry Regulatory Authority’s annual conference in Washington, Robert Cook, FINRA’s president and CEO, also queried SEC Chairman Jay Clayton as to why the agency “didn’t use the word fiduciary” in the Reg BI proposal.

Reg BI “is definitely a fiduciary principle, just like the fiduciary duty in the investment advisor space is a fiduciary principle,” Clayton responded concerning Reg BI, which establishes a standard of conduct for BDs and registered reps when making a recommendation involving investment advice to retail customers. “I thought calling them both fiduciary [advisor and broker standards] and then defining them would not make it clear that the relationship models were different.”

Clayton continued: “It’s important for an investor to understand that the relationship model of the broker-dealer is different than the relationship model of the investment advisor. I thought using the same term might make [investors] think they have the same relationship.”

The term fiduciary, Clayton continued, “can mean a lot of different things in a lot of different contexts. I wanted to make sure that we level-set people to say that, when you hear fiduciary duty in the investment advisor space, this is what it means. And when you hear what we’re proposing in the broker-dealer space, the best-interest standard, this is what it means.”

Clients should be able to “expect the core principle that the professional can’t put their interest ahead of the investor’s interest,” Clayton said. “That’s the same in both places” — a broker or advisor relationship.

But consumer advocate Barbara Roper, director of investor protection for the Consumer Federation of America, argues that by not using the term “fiduciary duty” regarding brokers, the agency is “adding to” investor confusion.

“If the intent is to provide the same fiduciary standard for the aspect of the relationship that, according to the SEC, the two business models have in common — investment advice — then the SEC needs to make that clear,” Roper told ThinkAdvisor on Thursday. “And they have not. By using different terms to describe the standard, they clearly imply that the standards themselves are different.”

The Commission suggests that the different treatment of “ongoing duty for brokers and advisors is based on differences in business model: Investment advisors provide ongoing advice and brokers provide one-time transactions so the duty should apply differently,” Roper explained. “But an investment advisor who enters into an agreement with a client to provide a one-time recommendation for an hourly fee would not have an ongoing duty of care, and brokers don’t necessarily limit themselves to one-time recommendations.”

As it stands now, “whether a broker has an ongoing duty is likely to be determined based on the facts and circumstances: Did the customer reasonably believe he was getting ongoing advice? (That’s how the issue was addressed under the DOL [fiduciary] rule as well),” Roper said.

However, according to Reg BI, “a broker that is in a long-term relationship with a customer in which they provide multiple recommendations throughout the year, and which they advertise as a relationship of trust, would have no ongoing duty to the client,” Roper added. “Instead, each recommendation would be treated individually, and the Commission is relying on Form CRS disclosures to make that clear to the client. What are they going to do if they test the disclosures and find they are clear as mud on that point?”

Indeed, during the Q&A with Cook, Clayton described the proposed Form CRS as “a candid conversation” between an advisor/broker and their clients about their relationship and a “critical part” of the package. “I’m anxious to hear what you think,” Clayton said.

“I hope it’s short enough that people will read it,” Clayton added, asking for feedback on “is it too much to ask to put the terms of the relationship in those four pages?”

The Consumer Federation and other consumer advocates, as well as the SEC, Roper added, “have equated the Advisers Act fiduciary duty with a best-interest standard, in part to make the standard more understandable for investors. What are those investors going to think when they read that an investment advisor is a fiduciary but a broker has a best-interest standard? If they see any difference in the standards at all, they are likely to think the best-interest standard is the higher standard, because best is best, right?”

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