Deluge of comment letters to SEC shows usual split on raising broker standards

Industry groups support SEC advice rule proposal, investor advocates call for overhaul

Aug 7, 2018 @ 5:29 pm

By Mark Schoeff Jr.

Financial industry groups are backing the Securities and Exchange Commission's investment advice reform package but suggesting tweaks, while investor advocates say it is weak and requires an overhaul.

Leading participants in the debate over advice standards split along familiar fault lines in comment letters to the SEC regarding the agency's proposal to require brokers to act in the best interests of their clients. The comment deadline was Tuesday.

The agency's rule — which was introduced earlier this year as the Labor Department's fiduciary died in court — is meant to raise the bar for brokers from the current suitability standard and give them a regulatory mandate similar to that governing investment advisers, who must act as fiduciaries when giving advice.

The Securities Industry and Financial Markets Association, a trade group for the securities industry, said the SEC generally hit the mark.

"The proposed standard significantly strengthens the standard of conduct applicable to broker-dealers by imposing additional investor protections that exceed those of the Financial Industry Regulatory Authority's suitability rule," SIFMA president and chief executive Kenneth E. Bentsen Jr., wrote in a comment letter Tuesday.

The Financial Services Institute, which represents independent broker-dealers and financial advisers, came to the same conclusion.

"The extensive disclosure and conflict mitigation requirements in the proposed rulemaking package go far beyond existing suitability requirements," wrote FSI executive vice president and general counsel David Bellaire in a letter Tuesday.

The reaction from investor advocates was a stark contrast.

The Consumer Federation of America said the proposal fell short in addressing a new broker rule and interpreting current adviser regulations.

"The standard as currently drafted is both too vague and too flawed to provide the assurance that investors will be adequately protected, and the commission's proposed guidance on investment advisers' fiduciary duty suffers from many of the same weaknesses," wrote Barbara Roper, CFA director of investor protection, and Micah Hauptman, financial services counsel, in a letter Tuesday.

Knut Rostad, president of the Institute for the Fiduciary Standard, wrote in a comment letter Monday: "It fails to provide a real best-interest standard and fails to require or urge that brokers eliminate conflicts or even mitigate them in any concrete and specific way."

The Public Investors Arbitration Bar Association, an organization of plaintiff's attorneys, released a report Tuesday outlining 15 changes to the SEC proposal, including adding a ban on sales contests and other financial incentives that can lead to broker conflicts of interest.

"This rule has to be strengthened to give it the real teeth it needs to protect investors," PIABA president Andrew Stoltmann told reporters on a conference call.

The attitude of interest groups toward the SEC's so-called Regulation Best Interest also influenced how fast they would like to see the SEC issue a final rule package.

"Because the proposals represent an important investor protection initiative, the SEC should proceed to final rulemaking as expeditiously as possible," Mr. Bentsen wrote.

The CFA warned the agency against "rushing" to final rules.

"Right now, we don't think it's anywhere close," Mr. Hauptman said in an interview.

That feeling was shared by Massachusetts Secretary of the Commonwealth William Galvin, who warned that the state would proceed with its own fiduciary rule for brokers.

"We are prepared to adopt a requirement that broker-dealers must provide advice and make investment recommendations under a fiduciary conduct standard comparable to investment advisers," Mr. Galvin wrote in a comment letter Tuesday.

Even groups that supported the SEC proposal had many suggestions for changes. SIFMA said the agency should modify its definitions of retail customer and conflicts of interest and clarify that disclosures do not have to be made at the point of sale.

The American Securities Association, which represents regional financial services firms, said the SEC should confirm that brokers only need to disclose conflicts.

"The SEC can meaningfully address broker-dealers' conflicts of interest by requiring them to fully and fairly disclose them, similar to the requirements for registered investment advisers, without the need to specifically mandate that certain conflicts be mitigated or eliminated," wrote Christopher Iacovella, ASA chief executive, in a letter Tuesday.

But the Investment Adviser Association, a trade group for advisers, asserted the SEC's best-interest proposal should extend beyond a product recommendation and cover the broker's entire relationship with a client.

"All advisory activities that broker-dealers agree to provide (e.g., ongoing monitoring for purposes of recommending changes in investments) should be covered by either Reg [Best Interest] or the Advisers Act fiduciary standard," wrote IAA president and chief executive Karen Barr in an a letter Monday.


What do you think?

View comments

Upcoming event

Sep 24


Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched


Schwab's Jeff Kleintop: Prep for volatility given China trade uncertainties

China could be considered a developed market in five to seven years , according to Jeff Kleintop, chief global investment strategist, Charles Schwab.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print