The lack of a “best interest” definition in the Securities and Exchange Commission’s best-interest proposal has made the impact and mandates of the proposed rule tough for firms and their lawyers to gauge.

That’s the takeaway from eight leading securities attorneys from Drinker Biddle who found holes and confusion in the the SEC’s two-page proposed rule (Reg BI) and the 400 pages of explanation that accompany it during a group presentation.

The term 'best interest' in not defined in the broker rule, but ironically can be pieced together from the SECs separate proposal for registered investment advisors, said Drinker Biddle Partner Jim Lundy, a former attorney in the SEC’s Division of Enforcement.

While the RIA proposal lays out a “duty to provide advice in the client’s best interest” as well as what a duty of care and a duty of loyalty requires for advisors to meet the standard, that same information is completely missing in the Reg BI proposal, Lundy said.

Applying definitions from the SEC’s advisor proposal to B-Ds becomes problematic, however, since the SEC has said they are not attempting to apply advisors’ fiduciary duty to broker-dealers or to create a uniform standard. “Where we run into hurdles on all of the guidance is the SEC says, ‘we are not doing a fiduciary standard for broker-dealers,’” Lundy said.

If the proposal is supposed to be a "suitability-plus" standard for B-Ds—taking Finra's suitability standard and adding to it—it is difficult to know exactly what is being added, Lundy said.

“Staff needs to go back and better align the best-interest terminology for the registered investment advisors and broker-dealer sides. ... In context of Reg BI, it is not clearly defined or understandable,” he said.

Muddying the water a bit more for B-D executives and attorneys studying the proposal is the fact that the SEC appears to have drawn from not only Finra's suitability rule, but also a suitability standard for advisors that has not been approved, as well as the DOL’s vacated fiduciary rule’s best-interest contract exemptions (BICE). “The SEC appears to have borrowed some of the concepts and language from BICE, where best interest is specifically defined,” said Drinker Biddle partner Tracey Salmon-Smith.

“Is this a fiduciary standard or not?” Salmon-Smith asked. “They clearly say it’s not, but they use the same terms, so it creates circular logic.”

The question that goes begging is how can proposals that are supposed to protect investors from conflicted advice and products work if senior securities attorneys can not make complete sense of them?

The SEC also imported DOL language that requires brokers to “exercise reasonable care and prudence” when evaluating a broker’s transaction for a customer and the series of transactions of which it was a part, Salmon-Smith said.

“By importing some of these same words and concepts, it clouds the degree to which this is suitability-plus or something else,” she added.

To the extent the SEC borrowed from the now defunct DOL fiduciary rule, greater clarification will be needed to clear up confusion, the attorneys agreed.

For instance, Drinker Biddle Partner Fred Reish said that while the SEC has imported the need for broker-dealers to mitigate conflicts of interest from the DOL rule, the concept is not adequately explained. “In discussion, the SEC says firms can mitigate by discharging the same compensation regardless of which product is sold. So if all mutual funds a firm sold charged customers a 3 percent load, and a .25 percent trail, would that work?” asked Reish, playing devil’s advocate.

“Not sure if we can tell from the SEC’s proposal what was intended,” added Reish, who said that firms should pay particular attention to mitigation for compliance purposes. “Under the 40s Act conflicts could be satisfied by disclosure, but by adding mitigation, it is something we haven’t seen before.”

Salmon-Smith said that while it is clear that the SEC is very much not attempting to create a uniform standard for brokers and advisors, “it becomes pretty apparent that there is convergence” between historical broker-dealer suitability concepts, RIA disclosure and fiduciary concepts and the third leg of the stool—the DOL fiduciary rule, she said.

Drinker Biddle predicts that the SEC’s proposal could be finalized and implemented in the next year and a half, though passage could be slowed by the announced exit of Commissioner Michael Piwowar and likely departure of Commissioner Kara Stein in the next year. Finding the votes to pass Reg BI will depend on the support from any new commissioners who are confirmed.