As the Securities and Exchange Commission moves full-steam ahead to finalize conduct rules designed to better equip investors to make informed decisions about what type of advisor to work with, the world’s top securities cop may already be lagging European Union standards.
That’s because EU standards already require advisors to fully disclose the actual fees and expenses investors are charged, asserts a new paper.
The “rigorous EU disclosure requirement contrasts with the SEC’s proposed Regulation Best Interest standards requiring disclosure of a list of fees or potential fees an advisor may charge, not actual charges,” the Institute for the Fiduciary Standard said in its paper. The SEC’s proposed disclosures can be found in its customer relationship summary.
The EU standards are the Markets in Financial Instruments Directive II (MiFID II), which was put in place in Europe in January 2018. Since its disclosure requirement for actual costs is new, many firms will be coming into compliance for the first time in first quarter, 2019.
MiFID II’s standard raises the transparency bar well above the U.S. SEC’s proposed Regulation BI and Form CRS, which only require a list of the tasks and services which will or may incur a cost or charge, the Institute argued.
“The new rule puts US wealth managers working in Europe in an interesting – or awkward –position,” Institute President Knut Rostad said. “These firms can treat all clients at the higher EU standard – or they can treat clients outside the EU at the lower US standard. It will be important to see what they decide to do.”
Specifically, MiFID II requires advisors and other financial professionals to provide an overview of costs and charges to clients based on “actually incurred costs.” Costs and charges must be “totaled and expressed both as a cash amount and as a percentage” and professionals must provide an “itemized breakdown” at the request of the client.
While MiFID II requires telling clients what they pay, the SEC’s proposed Form CRS in contrast only require telling customers how brokers and BDs are being paid. “It uses vague language, telling the investor they charge ‘a fee’ and that there are ‘additional fees,’ each of which may ‘vary’ and may be ‘negotiable,’” the institute said.
The SEC’s Regulation BI and customer relationship summary “should be re-engineered to resemble this MiFID II requirement,” the paper said.
The Institute is not alone in advocating actual fee disclosure. According to James C. Allen, Head of Capital Markets Policy for the Americas: “CFA Institute has long believed that investors should know how much they pay their investment adviser for advice and underlying investment expenses, as well as how much they actually spent in prior years. U.S. investors should benefit from disclosures similar to those mandated by MiFID II.”
The SEC “should require financial professionals to disclose actual fees and expenses investors pay. Not doing so falls short of investors reasonable expectations,” the Institute added.