Roughly two months after the Securities and Exchange Commission tentatively approved an investment advice standard for brokers, a wave of opposition is taking shape.
The series of three rules was adopted with reservations by SEC commissioners April 18. Included are rules requiring brokers to act in the best interests of their clients, mandatory disclosures for investment advisers and a new customer relationship summary.
Public comment is being accepted until Aug. 7. A final vote to adopt is needed before the rules become official.
What the rules do not do is establish a fiduciary standard of care for brokers. As opposition galvanizes, the SEC is finding out what many previous regulators already know: that gray area between fiduciary and suitability is a minefield.
Many are calling the SEC effort “suitability plus,” or suitability with strengthened disclosures and the requirement that conflicts be either mitigated through disclosures, or eliminated.
The SEC rules took on added importance after the Department of Labor fiduciary rules were struck down March 15, and virtually eliminated following several unsuccessful appeals.
In the meantime, a unique, twin-tiered wall of SEC opposition is forming with consumer advocates and registered investment advisors fighting together. The former group is being spurred on by AARP, while the advisors have a personal stake in seeing brokers held to the higher fiduciary standard that guides RIAs.
“This language is an offense to the industry,” said Richard J. Colarossi, president of Colarossi & Williams, certified financial planners in Islandia, N.Y. “Everything should always be in the best interest of the client, end of conversation.”
SEC Chair Responds
The SEC is trying to produce a regulatory scheme that will produce the best result for clients, while maintaining access and choice, SEC Chairman Jay Clayton said during a Senate subcommittee appearance earlier this month.
The agency feels it is possible to “significantly enhance retail investor protection” while maintaining the different regulatory standards, Clayton told members of the Senate Subcommittee on Financial Services and Government.
But the AARP is not a fan of the SEC’s efforts. The powerful senior citizens’ organization is leading a comment-writing drive by providing a template for members to send the agency. A webpage on the AARP site offers members a simple one-click option to file a comment.
So far, 196 members have used the option and they account for the bulk of the comments the SEC has received.
“We are struggling with increasing prices for everything on the money we saved for retirement,” reads a typical comment from Linda Wescott. “Have the compassion to do your job for those just entering this difficult and fearsome time of life.”
The Financial Planning Association is not content just to submit comments. The Denver trade association led several dozen members on a tour of Capitol Hill last week, where they urged lawmakers to hold out for tougher rules from the SEC.
Ben Lewis, spokesman for the FPA, deferred comment until the association completes its official comment letter.
A Fiduciary By Any Other Name
Melody L. Fein, an author, lawyer and expert in regulatory reform, said the SEC rule is close enough to a fiduciary standard that it ought to call it that.
“The failure to attach the label of ‘fiduciary’ to brokers when they clearly act in a fiduciary capacity will undermine the Commission’s intent to mitigate confusion by retail investors when they seek personalized investment advice,” Fein wrote.
“Brokers will not consider themselves fiduciaries, and investors still will not know the difference between a broker and an investment adviser.”
Not all of the reaction has been bad for the SEC. The Consumer Federation of America has long been a thorn in the side of regulators, but is optimistic about Regulation Best Interest and the companion SEC proposals, said Barbara Roper, director of investment protection for the CFA.
While expressing “serious concerns,” Roper said she believes the rule “is fixable.”
“For now at least, we’re trying to fix it rather than oppose it,” she said. “One problem is that the standard itself is ambiguous.”
The language the SEC is using nearly matches similar standards of varying degrees of strength, Roper explained.
“So where on that very wide spectrum does the SEC intend for this standard to fall?” she asked. “Since they haven’t clearly defined what they mean by best interest or the prohibition on placing the broker’s interests ahead of the customer’s interest, it is anyone’s guess.”
For his part, Clayton told lawmakers it is “not going to take forever” to get the SEC rule to a final vote. While some groups want to extend the comment deadline, Clayton was reportedly noncommittal on that option.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org.
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