SEC reforms impose new requirements on brokers and advisers, but some argue not enough

The Securities and Exchange Commission’s long-awaited investment advice reforms, which were approved Wednesday in a 3-1 vote, are virtually unchanged from an original proposal.

The reforms set new standards for brokers and slightly change rules for financial advisers.

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“Instead of having a uniform fiduciary standard for identical advisory services, there will continue to be two somewhat different market conduct standards to what can be identical advisory services,” said Duane Thompson, senior policy analyst at Fi360. “It’s another tangible sign that the broker-dealer business model has changed dramatically in recent years, where advice is a dominant feature of what they provide.”

While investor-advocate groups, along with the commission’s lone Democrat, Robert Jackson Jr., who voted against the reform package, have challenged the SEC rule as not pushing hard enough to provide investor protections by limiting broker conflicts of interest, SEC chairman Jay Clayton says the rule does move in that direction.

One of the highlights of the rule, Regulation Best Interest, imposes a new standard of conduct specifically for broker-dealers that goes beyond basic suitability standards, he said. It includes new requirements related to relationships between brokers and retail investors, including certain conflicts related to compensation.

(More: Historical timeline of the SEC advice rule)

In an enhancement from the SEC’s original proposal, Reg BI addresses account recommendations, including rollovers or transfers out of workplace retirement accounts.

Brokers also are required to disclose material facts about the broker-client relationship and broker recommendations, including the capacity in which a broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.

Broker-dealers will be required to establish and maintain written policies related to conflicts of interest, which means eliminating sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.

Both investment advisers and broker-dealers will be required to produce a client relationship summary at the start of the relationship. Form CRS will summarize information about services, fees and costs, conflicts of interest, and the legal standard of conduct, and disclose any disciplinary history related to the firm or the adviser. A survey conducted on behalf of the SEC last fall showed investors embraced but failed to grasp such disclosures meant to help them distinguish between investment advisers and brokers.

The rule also states that an investment adviser owes a fiduciary duty to its clients under the Investment Advisers Act of 1940 that is principles-based and applies to the entire relationship between an investment adviser and the client.

There is a broker-dealer exclusion under the law, which applies to a broker whose performance of advisory services is solely incidental to the conduct of his or her business and who receives no special compensation for those services.

“The winners here are clearly the securities and insurance industries, because they prevailed in overturning the DOL rule and argued that the SEC is the appropriate body to oversee those industries,” Mr. Thompson said. “But if you’re a broker-dealer, there are still big changes coming when it comes to managing and avoiding conflicts of interest.”

Related Topics: Securities and Exchange Commission