Vanguard is asking the Securities and Exchange Commission to go beyond existing rules to develop a “best interest” fiduciary standard of conduct for retail brokers who provide recommendations to investors. The rule should go beyond the current “suitability” requirements overseen by the Financial Industry Regulatory Authority’s (FINRA), the $4 trillion mutual fund and asset management juggernaut said.

“Vanguard believes that retail investors should always receive investment advice that is in their best interest,” Vanguard’s Chairman and CEO William McNabb III said in a letter to SEC Chairman Jay Clayton. Vanguard wants to see regulations that will hold brokers who provide ongoing and point-in-time advice to a fiduciary duty regardless of who they work for or the products they offer.

The broker-dealer industry as well as FINRA have deftly managed to avoid a fiduciary standard up to this point. 

But SEC action on a “best interest” rule for brokers is particularly important now because the portions of the Department of Labor’s new fiduciary rules that are yet to be implemented have the potential to create requirements that have no corollaries in broker-dealer or investment advisor regulation, McNabb said.

For instance, the DOL’s best interest contract exemption (BICE), which has been postponed until July 2019, has no correlation in broker or advisor regulations. Qualifying for such an exemption under the DOL rule will be the only way brokers and advisors will be able to receive variable commissions for selling variable and fixed-indexed annuities within a client’s IRA or retirement account. Vanguard has asked the DOL to streamline the BICE to provide flexible, principles-based conditions for arrangements to promote transparency and mitigate individual conflicts of interest.

 “Coordinated rule-making would recognize both the broker-dealer best interest standard and the investment advisory fiduciary duty as each satisfying the DOL fiduciary rule,” McNabb added.

Rather than permitting broker-dealers to rely solely on FINRA’s customer-specific and quantitative suitability, the SEC’s new best interest standard should require that a recommendation to a retail customer must be in that customer’s best interest at the time the recommendation is made, McNabb stated. Vanguard is advocating “best care” broker specifics that include:

• Duty of care

• Reasonable compensation

• Enhanced Disclosure

• Application of standard

• Enforcement specifics

Vanguard wants the new rule implemented in a manner that preserves investor choice while prohibiting conduct inconsistent with investors’ best interests. “For instance,” McNabb said, “the standard should be carefully developed to recognize that certain business practices, such as charging commissions, are not per se incompatible with operating under a fiduciary rule. But the receipt of unreasonable or undisclosed compensation is.”

The best-interest standards should be coordinated across all regulators to avoid investor confusion, the mutual fund giant added. Right now a retail investor has to navigate a suitability standard for broker-dealers, a principles-based fiduciary duty for investment advisors and a prohibited transaction-based fiduciary standard for retirement advice providers.

While DOL and SEC coordination are imperative, “we also urge the SEC to reach out to state regulators” so that individual states don’t adopt fiduciary rules inconsistent with federal standards,” Vanguard requested.

As for robo-advisors and hybrid advisors, McNabb said the Investment Adviser’s Act already effectively blankets the offerings with fiduciary rules. “We do not believe that the Commission should undertake any rulemaking to close nonexistent regulatory gaps,” he said. Instead the SEC should continue to work with the industry to see if investors need more guidance, like the Robo-Advisor Update the SEC issued earlier this year (https://www.sec.gov/investment/im-guidance-2017-02.pdf).   

 

In Vanguard’s brochure for its hybrid service offered through Vanguard Advisers Inc. (VAI), “the company explicitly states on the first page that ‘VAI has a fiduciary duty to act in its clients’ best interests…,” McNabb said.