It's taken eight years, but the SEC has finally moved closer to promulgating new standards of conduct for brokers and advisors. The move is set to remake compliance across the industry and builds on already sweeping changes wrought by the Department of Labor's fiduciary rule. To better understand this complicated rulemaking, Financial Planning asked several experts to break it down. Here are answers to five top questions.

1. What is it?
The SEC voted 4-1 to move forward with three proposals that would create a new standard of conduct for broker-dealers, update regulatory guidance on fiduciary duty for RIAs and require additional disclosure of conflicts of interest.

"My 30,000-foot takeaway is that in terms of investor protection, this is a very modest step forward," says Duane Thompson, senior policy analyst at Fi360, adding that the proposed rules are "top heavy with disclosure" requirements.

The first proposal, dubbed Regulation Best Interest, would require a broker-dealer making an investment recommendation to a retail client to act in that client's best interest. The proposal sets out three specific obligations:

  • Disclose to the retail client the key facts about the relationship, including material conflicts of interest.
  • Exercise reasonable diligence, care, skill and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
  • Establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives. Other material conflicts of interest must be at least disclosed.

The SEC proposed rules would also require brokers and advisors to provide clients with a disclosure document of no more than four pages that would notify them of the nature of the relationship and any potential conflicts of interest.

Bloomberg News

2. Is this a fiduciary rule?
No.

"You can't call it a fiduciary rule. I don't see any language on that," says Tim Slavin, Broadridge's senior vice president of retirement services.

While some people have been calling it a fiduciary rule as a kind of shorthand, this proposal would not create the same legal obligations as a true fiduciary rule. SEC Commissioner Hester Peirce, a Republican who voted to move the proposal forward, said as much.

"It would be better to say we're proposing a suitability-plus standard," Peirce said at the Wednesday public meeting.

Indeed, Commissioner Kara Stein, a Democrat, voted against the proposed rules in part because they fell short of imposing a fiduciary duty on brokers.

Critics say the current proposal would require brokers to mitigate but not eliminate conflicts of interest, and some criticize the SEC for not fully defining best interest.

"Fiduciaries in general have twin duties: loyalty and care," Thompson says.

These proposed regulations also do not harmonize standards for brokers and RIAs. Industry trade groups, several of which launched lawsuits to block the implementation of the Labor Department rule, had frequently said they preferred the SEC to take the lead in crafting a uniform standard for the entire industry.

3. Meanwhile, what's happening with the Labor Department's fiduciary rule?
The Labor Department's fiduciary rule was recently vacated by a federal appeals court (SIFMA, FSI, the U.S. Chamber of Commerce and others filed the lawsuit, arguing the department overstepped its bounds in crafting the regulation).

The Labor Department is still deciding whether it wants to appeal the 5th U.S. Circuit Court of Appeals' ruling. The department can seek a review by the entire 5th Circuit or go to the Supreme Court.

4. What's next for the SEC proposal?
There will be a 90-day comment period during which the public can give input on the proposal, which tallies over 1,000 pages.

"I'm through with the first hundred and I already have a lot of questions," Slavin says.

The Labor Department received tens of thousands of letters and emails during two public comment periods. The SEC might be similarly inundated. After its comment period ends, the commission may revise the proposals before voting on whether to finalize the rules.

The whole process may last another three to five months, Thompson says.

"I think there's an expectation that whenever you have a controversial rulemaking that you will have changes," he says, noting that at least one of the commissioners voted to move the proposal forward in order to elicit public feedback.

For example, the commission may have to clarify the difference between a sales recommendation and investment advice.

"It won't just confuse investors...it's already confused me, as a lawyer going through the 1,000 pages for the second time," Fred Reish, a partner at law firm Drinker Biddle, tweeted Friday.

And could the commissioners ultimately vote to shelf their proposal?

"In terms of procedures, they could drop this. They've done that before. But I don't think that is likely in this case," Thompson says, noting that Jay Clayton has made this a priority since becoming SEC Chairman last year and some groups that opposed the Labor Department's regulation have been supportive of the SEC's efforts.

Register or login for access to this item and much more

All Employee Benefit News becomes archived within a week of it being published

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access