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?