SEC Chairman Jay Clayton. (Photo: Andrew Harrer/Bloomberg)

Securities and Exchange Commission Chairman Jay Clayton signaled Tuesday that the agency may use the same language to describe the standard of conduct that investment advisors and brokers must adhere to when advising retail clients under the SEC’s advice-standards package.

Clayton engaged in a back-and-forth tussle with Sen. Elizabeth Warren, D-Mass., Tuesday during an SEC oversight hearing held by the Senate Banking Committee.

In attempt to clear up the confusion that investors have in understanding the difference between advisors and brokers, Warren stated that one option the agency could have chosen in lieu of its Regulation Best Interest for brokers was to “make brokers subject to the same standard as investment advisors. But you didn’t do that.”

Instead, the SEC’s proposal says that brokers “have to act in the best interest of the client, but then you never define what best interest actually means,” Warren stated.

Warren asserted that investors first need to understand the difference between a broker and an advisor, and second, that the proposal must clarify “how the fiduciary standard for investment advisors is different from the best interest standard for brokers, which is something you don’t define.”

Responded Clayton: “I think we’re pretty clear on what the best interest standard, and we’re going to be clear …”

“You’re saying you do define it [best interest] in the rules?” Warren retorted.

Clayton continued: “The best interest standard as we’ve proposed means …”

Warren interrupted: “I’m sorry, is it defined in the rules?”

Clayton answered: “Is there a specific definition that says this is what it [best interest] means? No. But there’s no specific definition that says this is what the investment advisor standard means.”

Challenged Warren: “You gotta start with the difference between an investment advisor and a broker.”

The SEC’s “own data show that lots of investors have no idea what the difference is between and investment advisor and a broker, and the legal standards that are different for each of them,” Warren added.

Warren then asked Clayton if the agency would “move away from a disclosure-based approach in your final rule and just adopt a uniform fiduciary standard for both advisors and brokers as Congress instructed in Section 913 of Dodd-Frank?”

Replied Clayton: “Let me tell you what we’re doing: The advisor standard, and I’m going to call it the baseline advisor standard, because advisors are allowed to contract around the standard, it’s not well-known, this is something that we want people to understand; the baseline advisor standard is that the advisor cannot put their interests ahead of the client interests. They are able to say, ‘but I’m going to do these things,’ and with informed consent, they are able to cut back on that standard. That’s not well-understood. We want that to be understood. But on the broker side, the fundamental duty is going to be that the broker cannot put her or his interests ahead of the clients’.”

Responded Warren: “Let me suggest Mr. Chairman, if it’s the same, then just use the same words.”

Said Clayton: “We may do that.”

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