Securities and Exchange Commission chairman Jay Clayton said the agency's proposal to raise investment-advice standards for brokers doesn't use the term "fiduciary" because it would have confused investors about the distinctions between brokers and investment advisers.
"I thought calling them both fiduciaries and then dividing them would not make it clear that the relationship models are different," Mr. Clayton said in an appearance at the Financial Industry Regulatory Authority Inc. annual conference in Washington on Tuesday.
Last month, the SEC released an investment-advice reform package that has a public comment deadline of Aug. 7. One of the proposals is a Regulation Best Interest for brokers, which would require brokers to act in the best interests of their clients.
Under current rules, brokers are held to a suitability standard when selling investment products. Investment advisers are governed by the Investment Advisers Act, which holds them to a fiduciary duty when working with clients.
Fiduciary principles are set out for brokers in Regulation Best Interest, Mr. Clayton said. But the SEC's proposal seeks to clarify for investors that their relationship with a broker is transactional, while one with an investment adviser is ongoing.
Some critics of the SEC's proposal maintain that by labeling the new broker standard "best interest," the SEC is muddying the waters between brokers and advisers.
Mr. Clayton said the SEC rule is attempting to set expectations the same for clients whether they hire an adviser or broker. The proposed rule would add requirements for brokers that enhance the suitability standard.
"In both cases, you can't put your interests ahead of your clients' interests," Mr. Clayton told reporters on the sidelines of the Finra conference. "In the case of a broker, you have to put procedures in place to ensure you're not doing that, and you have to mitigate the conflicts."
Earlier in the day, Brett Redfearn, director of the SEC Division of Trading and Markets, defended Regulation Best Interest against criticism that the measure doesn't define what "best interest" means.
Many investor advocates assert the fiduciary duty investment advisers must meet is a higher standard than what is proposed for brokers in Regulation Best Interest.
Mr. Clayton cautioned that "fiduciary" is a malleable term. Part of the SEC proposal is the agency's interpretation of advisers' fiduciary duty.
"There's been a lot of buzzwords — like fiduciary," Mr. Clayton said. "Fiduciary can mean a lot of different things in a lot of different contexts. I wanted to make sure we level-set on that."
The SEC will host roundtables focused on the investment-advice proposal package in Atlanta, Miami, Houston and Denver.