As the SEC readies a “best-interest” advisor rule proposal for summer release, the Consumer Federation of America is asking the agency to go beyond the “watered-down" standard being advocated by the financial industry.
“Notably absent from the industry’s proposed regulatory framework is any obligation to act in the customer’s best interests,” Barbara Roper, the CFA’s director of investor protection, said in a letter to SEC Chairman Jay Clayton in reference to proposals contained in the more than 30 industry comment letters that have poured into the SEC in anticipation of the rulemaking.
For instance, Roper said, while both LPL Financial and the Investment Company Institute have asked for an explicit duty of care and loyalty, a careful review of their comments makes clear that they intend for those duties to be satisfied almost exclusively through compliance and existing broker-dealer regulations. LPL had been one of the few B-Ds to explicitly support the fiduciary rule.
“Specifically, their duty of care would be satisfied through compliance with Finra’s [existing] know-your-customer and suitability obligations, and their duty of loyalty would be satisfied not by minimizing or avoiding conflicts, but by disclosing them,” Roper said. “If the [SEC] were to adopt their suggested regulatory framework, it would offer the appearance, but not the reality, of enhanced protection for non-retirement accounts while badly undermining existing protections for retirement accounts.”
Roper, a member of the SEC’s Investor Advisory Committee, said conflict of interest disclosures—the industry’s sole suggestion of enhancing existing B-D regulatory requirements—have been shown for years by consumer research to be “ineffective in protecting investors.”
At SIFMA's recent compliance and legal conference, Clayton said that despite the fact that the Department of Labor’s fiduciary rule was vacated just a week ago by the Fifth Circuit Court of Appeals, the SEC is pushing ahead with its own “best-interest” rule, which he hopes will set the framework for regulating investor interactions with investment advisors and brokers. “I would like the SEC’s action in this area to be the focal point around which people say, ‘Yes, that’s how we should look at the relationship, that’s the basis on which you should have to demonstrated compliance,” he said.
Clayton said his goal for the rule is to articulate a best-interest standard of care for broker-dealers, clarify investment advisors’ fiduciary rule and ensure that the differences between the two are clearly delineated. “We can do that in a fairly short, plain-English, accessible document,” said Clayton, who added that the SEC is trying to “bring some real analysis to this space” regarding what is in the best interests of the ordinary investor.
“This is an issue where the devil is definitely in the details. So, we won’t know until we actually see the SEC proposal whether it creates the true best-interest standard for brokers that we could enthusiastically support,” Roper told Financial Advisor. “It is encouraging that Chairman Clayton is talking about the need to clarify the Advisers Act standard, which too often gets neglected in this debate. Particularly with the growth of dual-registrant firms, the SEC needs to clarify that the Advisers Act fiduciary duty cannot be satisfied through disclosure alone. Best interest needs to include an obligation to act in the customer’s best interest and not simply disclose conflicts.”
The CFA says it wants to see explicit standards that require advisors and brokers to demonstrably act in customers’ best interests, including the following rules:
• A requirement that broker recommendations be “rigorous and based on reasonable assumptions.”
• That the results of broker analysis be delivered to the customer in the form of a recommendation.
• That brokers be required to act “without regard” to their or their firm’s financial or other interests.
The CFA is also pressing Clayton and the SEC to ensure there is a bright line in the regulation between salespeople and commission-based brokers and investment advisors. “Under no circumstances should brokers continue to be allowed to call themselves advisors (or consultants or wealth managers or whatever other deceptive title they choose to use) and market themselves as providing trusted advice if they aren’t going to be held to the strict fiduciary standard, including restrictions on conflicts of interest, appropriate to that role,” Roper said.