Investors are likely to be more, not less, confused by the Securities and Exchange Commission's new standards-of-conduct rule for brokers, Investment Advisers Association President and CEO Karen Barr said this week in a letter sent out to the organization’s members.
As a result of the confusion created by the SEC’s new Regulation Best Interest rules, it will be up to advisors and the IAA to educate the public regarding the the enduring value of fiduciary advice and the hidden landmines that still exist when working with a non-fiduciary broker, Barr said. The IAA has 650 member firms nationwide that manage more than $25 trillion in assets for a wide variety of individual and institutional clients.
At first blush, the SEC’s new rule package, which goes into effect next June, “appears to have made some modest enhancements to the standard of conduct for brokers,” Barr said. But “only time will tell whether new Reg BI has effectively or sufficiently raised the standard, depending on how it is interpreted, implemented, and enforced.”
What is clear is the rulemaking package presents a number of potential challenges that are likely to create more confusion for investors as they seek to find a financial professional they can trust to go the distance.
“First, brokers will market themselves as being required to act in their customers’ best interest,” Barr said. “The package has made this easier for brokers by using similar language in Reg BI and the Advisers Act fiduciary duty interpretation.”
The problem for consumers trying to assess the differences between brokers and advisors and assess their potential risks is that “brokers are not fiduciaries and Reg BI is not the same as a fiduciary duty. It is a transaction-by-transaction standard, limited both in time and scope,” she said.
The SEC’s approach to the “solely incidental” interpretation and “holding out” concepts did not fully address this regulatory confusion, Barr added.
“While we are pleased that some brokers will not be able to use the “adviser/advisor” titles, the SEC did not go as far as we requested with respect to brokers holding themselves out as providing ongoing advice,” she said.
In fact, the SEC’s interpretative release on what “incidental advice” a broker could provide without having to register as investment advisors, actually muddied the water more for investors, the IAA maintains.
“The SEC has now interpreted the brokers’ exclusion from the Advisers Act in such a broad way that brokers may be able to provide more than transaction-by-transaction advice without having to register as an investment adviser.