InvestmentNews Editorials

SEC's proposed advice rule is about as clear as mud

The way we see it, there's value in simplicity — so let's start there

Sep 22, 2018 @ 7:00 am

The effort by the Securities and Exchange Commission to clarify for consumers the differing standards of financial professionals could be all for naught.

While we give the SEC credit for attempting to salvage some of the momentum and investor-protection aspects of the Department of Labor's failed fiduciary rule, the current advice-reform package threatens to introduce a new quandary for investors.

At issue, as detailed in last week's cover story by InvestmentNews senior reporter Mark Schoeff Jr., is the fungibility of the fiduciary status of hundreds of thousands of brokerage representatives who are dually registered as investment advisers.

As currently proposed, the SEC's advice rule would allow dually registered advisers to toggle between acting as a fiduciary when giving advice and acting under a heightened suitability standard when wearing a broker hat. The regulation would require brokers to tell clients when they are acting in a brokerage capacity.

To help clients follow along, financial professionals would be required to provide a "customer relationship summary," or Form CRS, that lays out the differences between advisers and brokers in terms of standards of care, services and compensation.

The concept of an adviser swapping figurative hats in the midst of client interactions and communications, and having the client understand that swap, is bizarre at best and impossible to execute and police at worst.

While much of the financial services industry has been divided along stark lines when it comes to broker and adviser standards, InvestmentNews is not suggesting one side is better than the other.

What we are suggesting is that if the goal of SEC chairman Jay Clayton is to clarify for consumers the relationship they hold with a financial professional and the standards that professional must maintain, this hat-swapping strategy does not cut it.

(More: Clayton declines to set timeline for final SEC advice rule)

The SEC estimates that 61% of registered representatives work at dually registered firms, and 72% of registered reps working at firms with between $1 billion and $50 billion under management are with dually registered firms.

According to the Financial Industry Regulatory Authority Inc., 286,799 of the total 630,132 broker-dealer registered individuals are dually registered as investment adviser representatives.

At issue are the results of internal and external focus groups on the effectiveness of Form CRS, which are not promising. Consumers have a difficult time following along as dually registered financial advisers slide down their varied continuum of products, services and responsibilities.

One giant step toward clearing up the confusion would be removing the dual-hat option for dually registered representatives who use the title adviser (or advisor) and act in that capacity. Let brokers be brokers, and regulated as such, until they wade into the waters of the financial advisory world with any one client. The minute they do so, they can't go back to being a broker-only with that same client.

There may be other avenues for true client understanding, but what could be clearer than one person saying: "I am a financial adviser and I must act as a fiduciary." Or: "I am a broker and I must act in your best interest when recommending an investment."

No one can possibly think allowing the following type of explainer will solve the title confusion problem: "I am a financial adviser, except when I am not; then I am a broker. When I am an adviser I must ... When I am a broker I must ... I will tell you when I am a broker and when I am an adviser at various points in our interactions."

At this point the client's eyes will have glazed over, and the chance for clarity will be lost

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