The Securities and Exchange Commission released a fact sheet Wednesday on a final package of regulations that will make the most significant changes to investment advice standards in more than two decades.
The centerpiece of the reform package is Regulation Best Interest, which SEC chairman Jay Clayton says raises the broker standard beyond the current suitability model. The other three parts of the package are Form CRS, which is meant to help investors understand the differences between advisers and brokers; an SEC interpretation of the fiduciary duty that governors advisers; and an SEC interpretation of language that allows brokers to avoid registering as advisers — and being fiduciaries — if the advice they provide is "solely incidental" to their work and includes no special compensation.
The SEC approved all four measures Wednesday on a 3-1 vote. The rules will become effective 60 days after their publication in the Federal Register. The compliance deadline for Reg BI for brokers is June 30, 2020.
It likely will take observers days to understand whether the SEC made significant changes from the original proposal, which was released in April 2018.
The regulation does not establish a uniform advice standard. Instead, brokers and advisers will continue to be regulated separately, with brokers adhering to Reg BI. This is a key aspect of the package for Mr. Clayton, who said his goal was to preserve the broker business model so that investors would continue to have a choice in the type of investment professional they hire.
Mr. Clayton has argued that Reg BI is tougher than suitability because it requires brokers not just to disclose but to mitigate conflicts of interest.
Critics of the advice reform proposal asserted it simply codified the suitability standard, which requires brokers to recommend products that fit a client's objectives but allow brokers to select high-fee investments. Investor advocates have been pressing the SEC to state explicitly in the final rule that certain broker conflicts, such as sales quotas for proprietary products and incentives to sell products that have revenue-sharing features, must be eliminated.
The SEC vote is a landmark in the long journey of investment advice reform, which has been ongoing for at least two decades.
The SEC took the lead on advice reform when the Labor Department's fiduciary rule was vacated by a federal appeals court last year. The DOL measure would have required brokers to act in the best interest of their clients in retirement accounts. The Labor Department has indicated it will issue new advice rules for retirement accounts based on the final SEC regulations.
The SEC rule package could be vulnerable to a court challenge. SEC member Robert Jackson Jr., a Democratic appointment, had urged Mr. Clayton to build bipartisan support for the package so that it would be better able to withstand legal scrutiny. Mr. Jackson dissented to all four elements of the advice reform package at the hearing Wednesday.
And earlier this year, a group of former SEC chief economists criticized the economic analysis accompanying the SEC proposal, saying it was "weak and incomplete." Courts often look to such analyses when determining whether to vacate regulations.