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.”