The Securities and Exchange Commission is reviewing more than 6,000 comment letters, feedback from four investor roundtables and the results of third-party investor testing before deciding whether any changes to its best-interest proposal for broker-dealers are warranted.
“We are in the process of going through comments to see what changes if any we should be recommending,” Dalia Blass, director of the agency’s Division of Investment Management, said at a hearing Wednesday of the House Committee on Financial Services. That division together with the Division of Trading and Markets developed the best-interest proposal to address conflicts of interest by broker-dealers serving retail investors.
Blass did not offer any timeframe for when SEC staff would decide whether to recommend changes to the current best-interest proposal nor was she asked about that by committee members at the hearing.
Blass explained that the proposal is “tailored to preserve choice for retail investors,” specifically the choice to use brokers for commission-based accounts, whose numbers declined after the fiduciary rule developed by the Labor Department for retirement accounts took effect. (It was subsequently invalidated by a federal appeals court in June.)
The proposal would require brokers to make recommendations in the “best interest” of retail customers, but doesn’t define the term. It would require brokers to disclose certain conflicts of interest to clients, such as bonuses received for selling some products, but would not disallow those sales.
In addition, violations of the rule would be treated like violations of the current suitability rule covering broker-dealers; they would be decided by arbitration, not by potential class-action suits, which would have been allowed under the now-defunct Labor fiduciary rule.
The proposal would also restrict brokers from calling themselves “advisers” or “advisors” when communicating with retail clients, but dually registered firms and individuals could call themselves either.
The hourlong House Financial Services Committee hearing covered several other issues, including the proxy advisory industry — two firms are responsible for almost all proxy votes — modernization of the ETF industry and cryptocurrency funds.
Blass noted that the agency staff will host a roundtable on Nov. 15 “to get more information on the state of play among proxy advisors in order to make “appropriate recommendations” in that “high-volume, low-margin industry.”
She said the SEC proposal issued in June to modernize the rules governing ETFs would help “create a transparent, consistent regulatory framework.” Under the current framework, the SEC has issued over 300 exemptive orders allowing firms to launch new ETFs.
Responding to questions about cryptocurrency funds, Blass said the SEC considers Bitcoin a commodity, which precludes the creation of a Bitcoin ETF since ETFs require 40% of assets to be securities. For more information on the topic, she encouraged that potential sponsors of cryptocurrency funds to familiarize themselves with a letter on the SEC site highlighting the issues they should consider before offering such a fund and to comment on the SEC letter. As a commodity, Bitcoin funds could potentially be offered as an exchange-traded product. Blass also noted that the SEC is interested in blockchain.
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