As the August 7 deadline looms for comments on the Securities and Exchange Commission’s package of “best interest” practice proposals, TD Ameritrade Institutional wants to ensure the 6,000 registered investment advisors who work with the firm are fully aware of the potential landmines for their practices, especially when it comes to new SEC interpretations of what constitute conflicted advice and the potentially confusing playing field the “best interest” proposal creates for consumers trying to navigate the differences between advisor and broker regulations.
The fact that the SEC uses the same term “best interest” to describe the significantly different duties that advisors as opposed to broker-dealers owe their clients is underscored in the TD Ameritrade analysis, prepared by Fred Reish, a leading fiduciary expert and partner with Drinker Biddle.
“Unfortunately, while these differences are meaningful, there may be investor confusion,” Reish said. “That is because, if these rules are finalized, both broker-dealers and investment advisors will be able to say that they are subject to a best interest standard of care and duty of loyalty. On the surface, those statements will be accurate, but will sound as if the standards are the same. The differences, and their consequences, only become clear when the scope of the duties is understood. As a result, these rules have the potential to create confusion and misunderstanding in the marketplace.”
To make his point, Reish highlighted three significant differences in how the SEC defines “best interest” for advisors as opposed to broker-dealers, which emphasize the critically different standards of care and likely customer confusion that will result, the attorney said.
1. The application of the SEC’s Reg BI best interest standard for broker-dealers applies only to recommendations of securities transactions or investment strategies involving securities transactions. For example, it does not apply to recommendations of account types such as an IRA rollover, unless accompanied by a securities recommendation. To the contrary, all recommendations made by investment advisors are subject to the best interest standard, Reish said.
2. The best interest proposal for broker-dealers only applies to recommendations to “retail customers.” A retail customer is defined as a natural person, or the legal representative of a natural person (for example, a personal trust or an IRA), who uses the recommendation primarily for personal, family, or household purposes. That would exclude, for example, advice to charities, businesses, and retirement plans. In contrast, the RIA best interest standard applies to all of the advisor’s clients.
3. The best interest standard for broker-dealers would only apply at the time a recommendation is made. That means that there would be no legal duty for broker-dealers to monitor investment recommendations and accounts of their customers. In contast, investment advisors have a duty of care to monitor their investment recommendations and accounts at appropriate intervals, unless they contract to limit that responsibility.
“It is noteworthy that the duty of care for investment advisors and broker-dealers differ in significant ways with regard to monitoring,” Reish said. “Once the recommendation is made, the broker dealer no longer owes its customer a best interest duty of care.”
The time for advisors to speak up about these and other concerns with regard to the SEC’s proposals is on or before the SEC’s August 7 deadline. “Investment advisors should consider those questions and the others asked by the SEC and consider responding to them. It is important that the SEC receive input from investment advisors so that, when and if the final rules are written, they are based on the “real world” experiences of advisors,” Reish said.
“We certainly do expect some advisors will speak up,” TD Ameritrade spokesman Joseph Giannone said. “To date we have not fielded many calls, though several advisors have approached Skip [Schweiss, President of TD Ameritrade Trust Company and Managing Director of Advisor Advocacy & Industry Affairs] during recent meetings and events. We expect most advisors are still trying to make sense of the rules,” Giannone said.