SEC advice rule hearing updates

The SEC is debating new proposals to enhance standards of conduct for brokers and investment advisers, and Mark Schoeff Jr. is covering each development as it happens

Apr 18, 2018 @ 3:00 pm

By Mark Schoeff Jr.

The following is a string of dispatches from the SEC hearing on standards of conduct for financial advisers. Check back regularly for the latest updates.


The SEC voted 4-1 to release an investment advice rule package that totals approximately 1,000 pages.

Democratic commissioner Kara Stein dissented.

But even commissioners who voted to release the proposals for public comment did so after outlining sometimes long lists of areas of the package they said need to be improved.

Republican commissioner Hester Peirce said the proposed Regulation Best Interest that would require brokers to act in the best interests of their clients is mislabeled.

"It would be better to say we're proposing a suitability-plus standard," Ms. Peirce said, referring to the current rule that governs brokers' recommendations to clients.

Nonetheless, Ms. Peirce supported releasing the proposals.

"They're an excellent start on the path toward reform," she said.

SEC chairman Jay Clayton said the criticisms of the package show that much more work will have to be done on the package before they become final rules.

"They effectively illustrate the complexities we face as we move forward," Mr. Clayton said, wrapping up the hearing. "They represent the need for public comments."


Republican commissioner Michael Piwowar said the proposals could be improved in several respects. But he praised SEC chairman Jay Clayton for getting them up for a vote — a move that will put the SEC on the field with the Labor Department in setting advice standards.

"In summary, while I have some misgivings about certain aspects of all three recommendations, I overwhelmingly support putting them out for public comment," Mr. Piwowar said. "No longer can anyone say the SEC really needs to do something about this."

Democratic SEC commissioner Robert Jackson Jr. also outlined several misgivings he has about the advice-standards package, but said: "I am reluctantly voting to open these proposals for comment — and to continue the conversation about how best to protect Americans' financial futures from conflicted advice."

In particular, Mr. Jackson expressed concern that the proposal "strengthens the suitability standard."

At the end of her 25-minute statement blasting the SEC's investment advice proposal (see below), Democratic SEC member Kara Stein said she will vote against releasing the proposal.


Democratic SEC commissioner Kara Stein criticized the investment advice rule package as too weak, saying it does not do enough to mitigate or eliminate broker conflicts of interest.

"Despite the hype, today's proposals fail to provide comprehensive reform or adequately enhance existing rules. In fact, one might say, the emperor has no clothes," Ms. Stein said. "The proposals essentially maintain the status quo. It mainly reaffirms that broker-dealers have to meet their suitability obligations."

She went on to say:

"Does this proposal require financial professionals to put their customers' interests first, and fully and fairly disclose any conflicting interests? No. Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries? No. Does this proposal require financial professionals to provide retail customers with the best available options? No.

"Because there is no definition of the best-interest standard in the proposal, the name of the rule, in and of itself, is confusing," Ms. Stein said. "Calling the proposal Regulation Best Interest could cause retail investors to reasonably believe that broker-dealers are required to act in their clients' best interests. Perhaps it would have been more accurate to call it 'Regulation Status Quo.' Calling it Regulation Best Interest is not just confusing, it is in effect a form of mislabeling, which may be misleading and which could have deleterious consequences."


"We are framing the issues and preparing a path forward in which we welcome robust public comment," SEC chairman Jay Clayton said in an opening statement.

The SEC's investment advice rule package will consist of three main parts: regulation best interest, to establish a new best-interest standard for brokers; an investment adviser interpretation; and a new Form CRS – Relationship Summary, a four-page disclosure outlining the differing standards of care investment advisers and brokers must meet.

The rule package, which will total more than 1,000 pages, will have a 90-day comment period. It also will include a two-page "tear sheet" to encourage comments from investors, according to Dalia Blass, director of the SEC Division of Investment Management.


The SEC released a fact sheet at the open of the meeting, describing highlights of the rule-package proposal.

"A broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the retail customer at the time the recommendation is made," the fact sheet states.

A broker would fulfill the best-interest duty by disclosing material conflicts of interest, exercising "reasonable diligence, care, skill and prudence" to "have a reasonable basis to believe that the product is in the retail customer's best interest."

The broker also must establish and enforce policies designed to "identify and then at a minimum disclose and mitigate, or eliminate, material conflicts of interests arising from financial incentives."

The rule package maintains a fiduciary standard of care for retail investment advisers, but the proposed interpretation "reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to clients."

The "relationship summary" that advisers and brokers must give to clients would consist of a maximum four-page statement that highlights key differences in the types of services offered, differing legal standards of conduct and the fees clients might pay.

"Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms 'adviser' and 'advisor' — which are so similar to 'investment adviser' that their use may mislead retail customers into believing their firm or professional is a registered investment adviser," the fact sheet states.


The Securities and Exchange Commission is meeting at 3:30 p.m. ET on Wednesday to discuss and likely advance proposals to reform investment advice standards.

The commission is poised to begin rulemaking on advice policy for the first time since it was given authority by the Dodd-Frank financial reform law in 2010 to promulgate a regulation. An agenda posted on the agency website shows that the five SEC members will consider a three-part rule package.

The first item up for discussion is a regulation that would establish a standard of conduct for broker-dealers when providing retail investment advice.

Next, the commission will consider whether to propose rules that would require retail investment advisers and brokers to provide a "relationship summary" to potential clients, and additional disclosures. It also will discuss whether to propose "new restrictions on the use of the term 'adviser' or 'advisor' by broker-dealers in specified circumstances."

Finally, the commissioners will take up a proposal to an "interpretation of the standard of conduct for investment advisers."

By acting today to propose the rules, the SEC would start to catch up with the Labor Department's fiduciary rule, which was partially implemented last summer and is undergoing a review mandated by President Donald J. Trump that could lead to major changes.

Last month, the Fifth Circuit Court of Appeals vacated the DOL rule, which requires brokers to act in the best interests of their clients in retirement accounts. The DOL has until April 30 to decide whether to appeal that split decision.

The SEC's rule package will likely be open for a 60- to 90-day public comment period.

The agency is grappling with advice standards that currently are bifurcated. Retail investment advisers adhere to fiduciary duty that requires them to act in their clients' best interests. Brokers are held to a suitability standard that requires them to sell products that meet a client's objectives and risk tolerance, among other factors, but allows brokers to recommend investments that generate the highest revenue for themselves.


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