The Securities and Exchange Commission’s Investor Advisory Committee has been offering recommendations to the commission since it began taking comment on the proposed rule-making package containing Regulation Best Interest, Form CRS and title reform changes.
While the IAC is optimistic about the SEC’s REG BI proposal, it offered a few changes for consideration after reviewing public comments.
A recent statement from the IAC suggests that their previous suggestions were not taken by the SEC.
The statement reads:
“We appreciate that, while the Commission has chosen to adopt a regulatory approach that differs from the prior IAC recommendation, the Commission’s regulatory proposals and our proposed approach share common goals and certain common elements. In particular, we share the goal, expressed by Chairman Clayton and others, that the standard for broker-dealers and investment advisers alike be based on fiduciary principles designed to ensure that financial professionals act in their customers’ best interests and do not place their own interests ahead of their customers’ interests.”
According to the statement, the IAC believes that more could be done to strengthen Reg BI.
The subcommittee cites four ways to strengthen the proposal.
- Through clarifying the standard for broker-dealers and investment advisers with regard to the obligation to act in customers’ best interests.
- Through expanding the best interest obligation to cover rollover recommendations and recommendations by dual-registrant firms regarding account types.
- Through clearly defining the best interest standard explicitly as a fiduciary duty, acknowledging that specific obligations that flow from that duty will vary based on differences in business models.
- Through testing the proposed Form CRS disclosures and, if necessary, revising them to ensure that they enable investors to make an informed choice among different types of providers and accounts.
Regulation Best Interest
The IAC asserts that the proposed Regulation Best Interest standard needs to be more clearly defined.
The subcommittee says in its statement, “While we share the Commission’s view that the best interest standard should not be turned into a one-size-fits-all, prescriptive rule, we believe the basic meaning of best interest should be clarified when the Commission moves forward with its rulemaking, without abandoning the principles-based approach favored by the Commission.”
The IAC suggests that the basis for compliance for the best interest standard should be based on whether financial professionals had a “reasonable basis for the recommendation at the time it was made, and not how the recommendation ultimately performed for the investor,” according to the statement.
The suggested approach would not mean financial professionals have to recommend the lowest cost option.
Dual-Registrants and Rollovers
Citing the critical nature of the accounts held, the IAC implores the SEC to hold dual-registrants to the same best interest standard proposed.
The potential for long-term impact on the investor, the IAC says, means that “both types of recommendations inherently involve potential conflicts of interest, making it critical that advisers and brokers put their clients’ interests ahead of their own in making such recommendations.”
Rollover recommendations sounded alarm bells to the IAC because a client could be better served by one type of financial professional over another, depending on the client’s portfolio and needs.
“We therefore recommend that the Commission revise its proposed rules to cover these types of recommendations under the best interest standard,” the IAC said in a statement.
As A Fiduciary
IAC’s views are very much aligned with the SEC’s saying, “We share the Commission’s view that investors benefit from having a choice among different business models for receiving investment advice and recommendations. And we agree with the Commission that both the broker-dealer and investment adviser business models provide valuable choices for investors that should be preserved.”
Where the two groups different is in their view of the proposed best interest standard. The IAC believes the proposed regulation best interest standard is a fiduciary standard and should be implemented as such, but in a flexible manner.
The IAC believes keeping a distinction between broker-dealers and investment advisors is important to investors and still possible with a fiduciary standard such as a Reg BI.
IAC recommends the SEC make the proposed best interest standard uniform with the Investment Advisers Act standard, but diverge where its implementation is concerned based on facts and specific circumstances.
According to the IAC, “Adopting this standard for broker-dealers and refining the application and enforcement of the investment adviser fiduciary obligation to reflect the clarifications described above could therefore go a long way toward creating an even playing field in which brokers and advisers alike are held to a fiduciary standard that is appropriately tailored to their business models.”
In summary, the IAC says the fiduciary duty of the professional should “vary with the terms of the relationship.”
The advisory committee concludes that this approach would be in keeping with the SEC’s intended goals when it set out to develop a fiduciary standard without the word “fiduciary” – one that was based more on principles for broker-dealers.
Form CRS Is Flawed
The main complaint the IAC has heard from investors is that the proposed Form CRS is difficult to understand and therefore not cutting down investor confusion as to the roles and obligations of each party.
“That concern has since been reflected in many of the comment letters submitted to the Commission,” the IAC said in a statement.
For that reason, the IAC recommends the SEC test the disclosure for effectiveness before implementing it.
The IAC’s statement said, “In order to ensure that the Form CRS disclosures fulfill their intended purpose, we believe the Commission should engage in such usability testing, and make the results public before acting to finalize the disclosure provisions contained in the regulatory package.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.