Registered Investment Advisors and dually licensed advisors, you should get angry, mad, motivated and organize. The SEC just made a significant change and hardly anyone noticed for a few weeks. Over the last few days on Twitter, thanks to TD Ameritrade’s Skip Schweiss, this topic has come into focus, even prompting a response by the SEC.
So what is going on? Not only did the SEC not raise the broker-dealer standard to that of a fiduciary standard, but they are now banning the use of the word “fiduciary” – for fiduciary advisors in the new CRS form to describe the advisor’s standard of conduct. Let that sink in for a minute and let’s take a quick look back at a more innocent time – when we thought the SEC’s new rule had only confused consumers and blurred the lines between advisors and brokers – before we jump into the meat of this “fiduciary” ban.
Lackluster First Impression
The initial impressions of many RIAs, brokers and other industry players was that the June 5 SEC final rules on Reg BI and the new Form CRS (Client Relationship Summary) landed with a dull thud rather than a resounding bang. The noise made from these new rules seemed soft in comparison to the recent attempts by the Department of Labor to regulate the fiduciary and investment advice space.
While there were clear changes in the rules, and disagreement as to how much the new rules would change broker behavior, at least it was movement. After a nearly 10-year wait, the SEC finally passed something resembling fiduciary rules and did so without any immediate blowback from the financial services industry.
The loudest detractors were mostly consumer advocates saying the new rules would further confuse consumers by basically saying brokers and RIAs are the same thing. But they didn’t stop there. Not only did the SEC raise the appearance of broker advice, the new CRS form lowers the appearance of RIA advice.
Substantial Second Look
At first, I didn’t think much of the new CRS Form. More disclosures, which I expected to have little impact. But upon closer inspection, something else is clearly taking place.
The information this form was supposed to convey was pretty straightforward: an introduction, services, relationship, fees, costs, conflict language, standard of conduct, disciplinary history and additional educational information. Pretty simple, right (at least as far as 500-page legal documents go)? But the SEC’s final rule has a few stark differences from their proposed rule.
In the original proposal, the SEC used language for RIAs to include in the form that states:
“We are held to a fiduciary standard that covers our entire investment advisory relationship with you. [For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.]”
The bracketed language would be removed if the advice relationship was not meant to be ongoing with the RIA.
But, to many an RIAs’ surprise, the new and final rule, which becomes effective June 30, 2020, removed the fiduciary language entirely. The SEC said there was too much consumer confusion with the form, so they made a few tweaks (a.k.a. completely changed the meaning of what was originally stated in the proposed rule).
The final form states:
“For example, we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including (among other changes) eliminating the word ‘fiduciary’ and requiring firms—whether broker-dealers, investment advisers, or dual registrants—to use the term ‘best interest’ to describe their applicable standard of conduct.” (see page 27 – emphasis added)
You read that right! The SEC now requires that RIAs stop referring to their legally required adherence to a fiduciary duty, and puts them on the same playing field as BDs by saying everyone has to use “best interest” from now on.
The reason? “Fiduciary” was seen as jargon and not well understood by consumers – yes, the same word used in healthcare, the legal system and other industries to describe the highest level of trust is now considered to be too confusing.
So instead, it was replaced by a brand new standard and term of art called “best interest.” You know, that new standard that the SEC declined to fully define.
Apparently, the SEC’s idea of clearing things up for consumers is saying everyone in the financial services industry is held to a vague and undefined standard. Not only does it leave more room for, let’s say, “creative interpretation,” it’s arguably untrue. It implies all three have the same standard of care when, in fact, they legally – under federal law – do not have the same standard of care.
New Dangers In Disclosures
RIAs need to understand how big of a deal this really is. The SEC just made it against the rules for you to accurately identify your federally mandated standard of care on your Client Relationship Summary form. This is wholly unacceptable and tremendously weakens the consumer protections and meaning behind the Investment Advisors Act.
Now, the SEC has come out in the last few days and stated that RIAs are fiduciaries and they did not ban the use of the word fiduciary across all aspects of the ADV or CRS, just in relationship to the standard of conduct owed. So, for instance, in your two page CRS, you could discuss your services or conflict of interest by using the term fiduciary.
What further confounds the issue is that the SEC didn’t take the position that RIAs are not fiduciaries, in fact they stated it on page 2 of their new interpretation regarding the standard of conduct for registered investment advisers and have since followed up to questions about the “fiduciary” ban on the CRS by stating RIAs are fiduciaries. So then why ban the language as part of the standard of conduct disclosure?
This brings up a huge issue. Can you, as an RIA, rightfully and legally meet your disclosure requirements by following the new CRS form guidance from the SEC? Is it legally defensible to only state, as an RIA, that you have a best interest standard of care when you are legally held to a higher standard of case a fiduciary?
Leaving off your legal standard of care should be seen as a failure to properly disclose. At a minimum, this would appear to be leaving out material information to properly inform a client.
RIAs, it’s time to organize: this version of the rule is not only unworkable, but dangerous. It is in direct conflict with your federally mandated standard of care, and by leaving it off of the form, you cannot do yourself or your clients justice. While there does appear to be some wiggle room here for RIAs to use fiduciary on the form, it still appears, even after the SEC’s clarification this week, that you cannot use the term fiduciary to describe your standard of conduct on the new CRS Form.
Jamie Hopkins, Esq., LLM, MBA, CFP®, RICP®, is the Director of Retirement Research at Carson Wealth and a former professor of Taxation at The American College, where he helped co-create the Retirement Income Certified Professional® (RICP®) education program. Jamie strives to increase the retirement income security of Americans by delivering practical and trusted retirement research and education. His most recent book, "Rewirement: Rewiring The Way You Think About Retirement," details the behavioral finance issues that hold people back from a more financially secure retirement. He has been selected by InvestmentNews as one of the top 40 financial service professionals under the age of 40 and was also selected by The American Bar Association as one of the top 40 Young Attorneys in the country. In 2017, Trusts & Estates Journal awarded Professor Hopkins the Distinguished Author Award for his article on the Department of Labor Fiduciary Rule. He holds his LLM in Taxation from Temple University School of Law and his J.D. from Villanova University School of Law.