SEC advice rule: Industry, investor advocates split

At SEC meeting, both sides say agency must better define what 'best interests' means

Jun 14, 2018 @ 2:33 pm

By Mark Schoeff Jr.

A financial industry representative defended the Securities and Exchange Commission's proposed investment-advice reforms while investor and adviser advocates said that the changes wouldn't go far enough, as both sides appeared at an SEC Investor Advisory Committee meeting on Thursday.

The session was the first wide-ranging public debate about the proposal, which would require brokers to act in the best interests of clients and is open for public comment until Aug. 7.

The SEC's approach, designed to raise the standard of care for brokers while maintaining separate regulations for brokers and investment advisers, drew criticism from some witnesses at the IAC session held at the Georgia State University College of Law in Atlanta.

The critics said that the proposal does not subject brokers to a fiduciary standard, which investment advisers already meet, and that the so-called Regulation Best Interest for brokers is hazy.

"The 'best interest' standard is vague and undefined and, depending on how it is interpreted, could do little more than rebrand the existing FINRA suitability standard as a best interest standard," said Micah Hauptman, financial services counsel at the Consumer Federation of America.

But Ira Hammerman, executive vice president and general counsel for the Securities Industry and Financial Markets Association, said that the SEC rule would raise the bar for brokers by requiring them to mitigate conflicts of interest and act with diligence and prudence.

"Regulation Best Interest is essentially a fiduciary standard," Mr. Hammerman said. It "is a significant step up from the existing suitability standard."

SEC Chairman Jay Clayton made a similar assertion on Wednesday during an SEC investor town hall in Atlanta.

Maureen Thompson, vice president for public policy at the Certified Financial Planner Board of Standards Inc., told the IAC on that her organization's recent update of the designation's standards might provide guidance for the SEC.

"Under our new standards, best interest clearly and unambiguously means a fiduciary duty," Ms. Thompson said on Thursday.

The proposed best-interest regulation also drew criticism for applying to each investment recommendation a broker makes rather than the body of advice he or she gives to a client.

(More:Hurry up and kill the DOL fiduciary rule already, insurance groups tell 5th Circuit)

"It is critically important to resolve any ambiguity regarding what standard of conduct would apply where a broker, whether through agreement, course of conduct or by virtue of holding out, has something other than an episodic relationship with an investor," said Karen Barr, president and chief executive of the Investment Adviser Association.

There was some evidence that the industry and investor advocates could find common ground.

Barbara Roper, an IAC member and director of investor protection at the Consumer Federation of America, suggested clarifying steps brokers must take to mitigate conflicts by prohibiting brokerages from creating incentives likely to violate a client's best interests, such as sales quotas for proprietary products.

Mr. Hammerman was receptive.

"To use your example of sales quotas for proprietary products, maybe the commission can address that fact pattern in explaining whether that would or would not satisfy best interest," Mr. Hammerman said. "There could be a dozen or so other fact patterns that would give folks some clear guidance on how to take this principled approach and apply it day-to-day."

A second panel at the IAC session discussed the new disclosures for investment advisers and brokers contained in the SEC advice proposal.

(More:Advisers encourage investors to take fiduciary into their own hands)

Four of the SEC's five commissioners attended the IAC meeting, the first ever held outside of the SEC's Washington headquarters.

SEC member Robert Jackson Jr. said that the topics aired at the IAC meeting — clarifying the term best-interest, delineating conflicts of interest and testing disclosures — will help determine his vote on advice regulations.

"The degree to which we do or don't address these issues is going to be crucial to my view of any final rule," Mr. Jackson said.

SEC member Hester Peirce said that the discussion highlighted key sticking points of the SEC's proposal.

"This is exactly the kind of feedback we were hoping to hear," Ms. Peirce said.

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