InvestmentNews Editorials

SEC advice rule: Time for brokers, advisers to weigh in

Much work remains on the proposal, so feedback is crucial

Apr 21, 2018 @ 6:00 am

The Securities and Exchange Commission has proposed a new rule governing investment advice, and all interested parties should make their voices heard through constructive feedback during the 90-day comment period. Who better to share their opinions and ideas for improvement than the brokers and advisers working day to day in this industry, as well as the clients they serve?

Given that any final rule will not be promulgated until after a period of comments and revisions — even the SEC commissioners said there's still a lot of work to do — it is too early to fully evaluate the proposal's impact.

But the key takeaway from this first iteration is that it seeks to more clearly demarcate for investors the differences between a broker and an investment adviser — what services each provides and what their respective responsibilities are to clients. Brokers will not be allowed to use the term "adviser" or "advisor" to describe themselves.

(More: SEC advice rule hearing updates)

In the overview of the proposal, SEC Chairman Jay Clayton wrote that "it has long been recognized that many investors do not have a firm grasp" of the differences between broker-dealers and investment advisers.

Key goal

Eliminating that confusion was a key goal for the rule listed by Mr. Clayton in February at a conference in Washington. If the final rule can help investors understand the disparity between brokers and investment advisers and the standards they must adhere to, it will be a step toward making sure investors get what they pay for.

The proposed rule also requires brokers to put clients' financial interests ahead of their own. That is, an investment must be in the client's best interest. This echoes what the Employee Retirement Income Security Act requires of those investing pension assets: that they be invested solely in the interest of the beneficiaries.

That may not be up to the Department of Labor's fiduciary standard that was vacated by the 5th U.S. Circuit Court of Appeals in March, but it appears to be a step above the suitability standard under which brokers have long operated.

Also, under the proposed rule, broker-dealers must put in place and enforce policies and procedures to eliminate or mitigate any financial conflicts that exist.

One key point in favor of an SEC rule is that it covers all advisers, brokers and investors, not only those providing advice on retirement issues for companies or individuals. The Department of Labor fiduciary rule applies only to retirement advice. So the SEC rules' protection will be wider, if not as deep.

A couple of early concerns about the proposal have been voiced broadly. First, the effectiveness of the best-interest standard in protecting investors will depend on the final regulatory language and the intensity with which it is enforced.

Second, the rule is more than 900 pages long, and will take some time to digest. No one should comment on the SEC's effort until they have read and understood the various provisions applicable to them.

Further, the disclosure element involves a standardized form of up to four pages outlining the services, legal standards, customer fees and conflicts. Real consideration should be paid to how many clients will actually take notice of, read and understand four pages of disclosure, and therefore how effective it will be for enhancing investor clarity on the relationship.

Judging by the divided opinions held by the SEC commissioners, there will be many conflicting views on various parts of the rule. While the vote was four to one in favor of releasing the proposal, three additional commissioners expressed misgivings about its current state. There's a long road ahead.

Nevertheless, the SEC is to be commended for finally taking a step to improve the protection of all investors. Now it is time for brokers and advisers to weigh in.


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