Cheers, Jeers for SEC's New Advice-Standards Rules

The Securities and Exchange Commission, after passing Wednesday by a 3-1 vote its advice standard package, released the final rules for Regulation Best Interest, the Standard of Conduct for Investment Advisors, and Form CRS Relationship Summary/Amendments to Form ADV.

While a lot of lengthy reading is ahead, industry officials and groups were quick to weigh in with their initial thoughts on the rules.

Here are the new rules:

• Regulation Best Interest
• Standard of Conduct for Investment Advisers
• Form CRS Relationship Summary; Amendments to Form ADV

The SEC also issued interpretive releases for the agency’s interpretation  of “solely incidental,” and the standard of conduct for registered investment advisors.

The Financial Planning Association, which is currently holding its Advocacy Day in Washington, said that while the group will be analyzing the new rules, “unfortunately, Reg BI falls short” of a high “fiduciary” standard. The SEC, the FPA said in its statement, “needs to work to provide millions of American investors with confidence that their financial professional is working in their interest at all times.”

What Your Peers Are Reading

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, stated that “as written, the SEC’s Regulation Best Interest rule will impose a materially heightened standard of conduct for broker-dealers when serving retail clients. While principles based, the rule is specific with respect to the duty and obligations brokers owe to their clients, and what steps they must take to comply, including the obligation to eliminate, or disclose and mitigate, certain conflicts of interest. Not even the so-called fiduciary standard under the Investment Advisers Act includes the obligation to eliminate or mitigate conflicts.”

The Investment Adviser Association took issue with Bentsen’s statement, saying that ”advisors must fully and fairly disclose all conflicts – and must eliminate or mitigate conflicts that would prevent them from acting in a client’s best interest.”

However, Bentsen conceded that “compliance with the rule will not be easy for the industry. Firms will need to make substantial changes. The costs to implement will no doubt be significant, but, we believe, worthwhile to uniformly enhance investor protection to the level investors should and do expect, while preserving investor choice and access to investment advice.”

Fred Reish, partner at Drinker Biddle & Reath, stated that “it looks like the SEC has adopted strong rules for rollovers.”

The SEC, Reish continued, “has expanded the rollover rules to include recommendations to defined benefit plans and profit sharing plans. The proposed Reg BI applied to rollover recommendations that involved securities recommendations.  A rollover recommendation to a 401(k) participant necessarily involved a securities transaction because the recommendation implicitly include the liquidation of the participant’s investments to that cash could be rolled over to an IRA.”

The final rule “now refers to retirement plans more generally and no longer requires that the recommendation involves a securities transaction,” Reish said.

Also, for a recommendation of a  rollover to a 401(k) participant, the final Reg BI “specifically requires a comparison of the IRA to the participant’s account in the plan,” Reish added.

He pointed to Reg BI’s Care Obligation, which will require “a broker-dealer to have a reasonable basis to believe that the IRA or IRA rollover is in the best interest of the retail customer … taking into consideration the retail customer’s investment profile and other relevant factors, as well as the potential risks, rewards, and costs of the IRA or IRA rollover compared to the investor’s existing 401(k) account or other circumstances.”