SEC advice rule: Jay Clayton says brokers must adhere to 'fiduciary principles'

However, he believes they also deserve a different standard of care from investment advisers

Apr 26, 2018 @ 2:16 pm

By Greg Iacurci

The head of the Securities and Exchange Commission said Thursday that brokers would be governed by "fiduciary principles" under the agency's newly proposed investment-advice rule, but argued they also deserve a different standard of care from investment advisers.

The SEC's rule, proposed last week, would create a "best interest" standard for brokers when making investment recommendations to clients. Critics lambasted the standard as being too weak, saying it's similar to brokers' current "suitability" standard and doesn't align with investment advisers' fiduciary responsibilities.

"We've called it the best-interest standard, but I want to be clear — for broker-dealers, there are core fiduciary principles embodied in that best-interest standard," Jay Clayton, chairman of the SEC, said during a House Appropriations Committee hearing on the agency's fiscal-year 2019 budget.

"In fact, those fiduciary principles are, I believe, the same as the fiduciary principles that are embodied in the investment-adviser standard," Mr. Clayton added.

The SEC's proposed regulation comes amid an intense debate over investment-advice conduct. The Department of Labor issued a rule in April 2016 that sought to eliminate conflicts of interest in brokers' advice to retirement customers; this rule, parts of which went into effect in June, created a fiduciary standard for brokers and advisers getting compensated for an investment recommendation.

(More: SEC advice rule — Here's what you need to know)

However, the Trump administration is reviewing the rule and observers believe the agency will ultimately weaken it. At the same time, the 5th Circuit Court of Appeals last month vacated the rule, which would take the regulation off the books if the ruling holds.

The SEC rule differs from the DOL's approach to broker relationships, which at least one House Republican seemed to acknowledge during the hearing this morning.

Rep. Tom Graves (R-Georgia), chairman of the House Subcommittee on Financial Services and General Government, said what "we once knew as a 'fiduciary' rule is now being re-discussed as the 'best interest' rule."

Mr. Clayton explained during the hearing that the SEC's approach attempts to take brokers' and advisers' different business models into consideration.

"We sought to harmonize the actual duties that are owed while recognizing those differences," he said.

When asked by Rep. Jaime Herrera Beutler (R-Washington) if the SEC intends to continue taking a "tailored approach" to the two groups as it reviews its advice rule, Mr. Clayton said: "In short, the answer is yes."

Ms. Beutler also expressed a level of concern for loopholes that may emerge from the title-reform part of the SEC regulation, which would prohibit brokers from referring to themselves as an "advisor" or "adviser."

She asked Mr. Clayton if he intends to say what these groups should call themselves, in order to help clients who may be confused by new naming conventions that brokers create as a workaround.

"This is something I want to hear comment on very much," Mr. Clayton said.


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