SEC final advice rule hearing updates

The agency is debating and voting on a package of regulations — including Reg BI — to reform financial advice standards, and Mark Schoeff Jr. is covering each development as it happens

Jun 5, 2019 @ 9:30 am

By Mark Schoeff Jr.

The following is a string of dispatches from the SEC hearing on its final rule on advice standards for brokers and financial advisers. Check back regularly for the latest updates.


The SEC approved each of the four parts of its investment advice reform package, 3-1, with the votes falling along party lines even though some of the commissioners stressed it was not a political exercise.

Regulation Best Interest, which is designed to raise the standard of conduct for brokers; the Form CRS, which is meant to help investors understand the differences between advisers and brokers; an interpretation of the fiduciary duty that governors advisers; and an SEC interpretation of language that allows brokers to avoid registering as advisers were all approved.

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.

(Webcast: Dive inside the newly released SEC advice rule)

When Republican SEC commissioners Hester Peirce and Elad Roisman both said they support the investment advice reform regulatory package, it was clear all measures would pass, despite Democratic SEC member Robert Jackson's dissent to them all.

Mr. Jackson's criticism of the package was particularly harsh. He said it put Wall Street's interests ahead of investors' interests.

He was called out on that assertion by Mr. Clayton, who defended the SEC staff.

"I don't think you're saying that their intent is to do that," Mr. Clayton said to Mr. Jackson. "They put investors first."

Mr. Jackson responded: "I am not, sir, and I very much appreciate the opportunity. Just to be clear, what I had in mind is the legal standard that we are promulgating today and whether it requires investors to go first. With respect, the staff and I disagree."

Ms. Peirce also addressed criticism of the package.

"Regardless of characterization of the product by my colleague commissioner Jackson, take a look at what the release actually says before you proclaim it to be a success or a failure," she said.


Democratic SEC member Robert Jackson Jr. said he will vote against the investment-advice rule package today because it does not raise the standard of care for brokers.

"Rather than requiring Wall Street to put investors first, today's rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice," Mr. Jackson said. "Even worse, contrary to what Americans have heard for a generation, the commission today concludes that investment advisers are not true fiduciaries. Today's actions fail to arm Americans with the tools they need to survive the nation's retirement crisis. Accordingly, I respectfully dissent."

(Webcast: Dive inside the newly released SEC advice rule)

Mr. Jackson criticized Reg BI for failing to define the term "best interest."

"The core standard of conduct set forth in Regulation Best Interest remains far too ambiguous about a question on which there should be no confusion," he said. "As a result, conflicts will continue to taint the advice American investors receive from brokers. Moreover, the rule relies on a weak mix of measures that are unlikely to make much difference in improving the advice ordinary Americans receive from brokers."

He also asserted that Reg BI allows conflicts to be mitigated through disclosure.

In his opening statement, SEC chairman Jay Clayton rebutted such criticism.

"Regulation Best Interest cannot be satisfied with disclosure alone," he said.

Mr. Jackson also criticized the interpretation of the standard of conduct for investment advisers.

"The final guidance the majority approves today removes language from last year's proposal stating that the law 'requires an investment adviser to put its client's interests first.' The guidance suggests that a careful reading of decades-old cases reveals that we were wrong last year to say that this is the law. I disagree," Mr. Jackson said.

Prior to Mr. Jackson's statement, Mr. Clayton dismissed criticism that the rule package waters down the standard of conduct for investment advisers.

Mr. Jackson also said it's crucial for states to continue efforts to establish their own fiduciary duty laws. Nevada and New Jersey are working on such rules. Backers of the SEC advice rule package say it should preempt state law.

A future SEC may overturn the regulations it will approve today, Mr. Jackson suggested.

"I firmly believe that one day soon — with the support of many of you in this room — the commission will do more," Mr. Jackson said. "In the meantime, I call on all of you who have been so crucial to this effort to keep fighting."


The Form CRS Relationship Summary that the SEC will approve today must be delivered by brokers and advisers at the beginning of a relationship. Firms must summarize services, fees and costs, conflicts of interest, legal standard of conduct, and whether a firm or its representatives have a disciplinary history, according to the SEC fact sheet.

Form CRS will have a standardized question-and-answer format and will highlight on the SEC website, which contains videos that provide basic information about brokers and advisers.

(Webcast: Dive inside the newly released SEC advice rule)

In his opening remarks, Mr. Clayton shot down criticism of the original Form CRS proposal. Skeptics said the document would create more confusion than it clears up.

"No existing disclosures provide the kind of transparency and comparability that the relationship summary will provide," Mr. Clayton said. "The criticism also ignores the extensive amount of investor testing and other information our staff considered in developing the final recommendations, leveraging their considerable expertise with investor disclosures."


SEC Director of Trading and Markets, Brett Redfearn, said Regulation Best Interest would enhance the broker standard of care beyond current suitability rules because it requires brokers to consider the costs of products they recommend as well as "all reasonably available alternatives."

He said Reg BI requires that brokers not put their interests ahead of their clients', and that it contains provisions that are similar to the fiduciary duty that applies to investment advisers.

(Webcast: Dive inside the newly released SEC advice rule)

Reg BI requires policies and procedures that mitigate conflicts that create incentives for brokers to put their interests ahead of their clients; prevent material limitations on offerings, such as a limited product menu or offering only proprietary products; and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on the sales of specific products, according to the fact sheet.


SEC chairman Jay Clayton began Wednesday's open meeting by saying the centerpiece of the agency's investment advice reform package, Regulation Best Interest, will "substantially enhance the current broker-dealer standard of conduct beyond suitability."

He said compliance "cannot be satisfied through disclosure alone." He added that the goals for the rules the four-person commission is about to vote on include setting standards of conduct for brokers and investment advisers that are "in line with reasonable investor expectations" and preserving investor choice in whether to hire a broker or adviser.

The rulemaking package aims to reduce inconsistency in the oversight of brokers and advisers, Mr. Clayton said.

A fact sheet distributed at the SEC open meeting Wednesday says Regulation Best Interest "provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation."

(Webcast: Dive inside the newly released SEC advice rule)

The fact sheet also says that in an enhancement from the original proposal, Reg BI would apply to account recommendations, including those to roll over or transfer assets in a workplace retirement plan to an individual retirement account.

Under Reg BI, brokers must "mitigate conflicts that create an incentive for the firm's financial professionals to place their interest or the interests of the firm ahead of the retail customer's interest," the fact sheet states.

In his opening remarks, Mr. Clayton emphasized that the rule package maintains separate regulations for brokers, who must adhere to Reg BI, and advisers, who will continue to meet a fiduciary standard.

He rejected the idea of a uniform standard because it could lead to a restriction in advice business models.

"A one-size-fits-all approach ... presents significant risks," Mr. Clayton said.


The Securities and Exchange Commission is headed today for what likely will be a partisan and perhaps contentious vote on a final package of investment advice reform regulations.

Even before the four-member agency begins discussion this morning, there are indications the lone Democrat on the commission, Robert Jackson Jr., will oppose the regulations — the centerpiece of which is Regulation Best Interest, designed to raise the broker standard of care. In a media advisory issued Tuesday night, several groups of consumer advocates who have denounced the SEC proposal for being too weak on investor protection announced Mr. Jackson will participate at 1 p.m. in a media teleconference call hosted by Americans for Financial Reform.

In a speech in April, Mr. Jackson reiterated his misgivings about the SEC advice reform proposals and called on SEC chairman Jay Clayton to ensure bipartisan support to protect it from a potential lawsuit.

The SEC will proceed to a vote today with only four of its usual five members in place — Mr. Clayton, Hester Peirce, Elad Roisman and Mr. Jackson. The nominee for the open Democratic seat, Allison Herren Lee, is scheduled to appear before the Senate Banking Committee today for a confirmation hearing.

The potential partisan split over the SEC proposals is the reverse of the political fault line created by the Labor Department's fiduciary rule, which was overturned in a federal appeals court last year after fierce brokerage industry opposition.

Generally, those who opposed the DOL rule — brokerage firms and Capitol Hill Republicans — for being what they said was too complex and costly, have supported the SEC's advice reform effort. Those who supported the DOL rule — investor/consumer advocates, investment adviser group and congressional Democrats — have criticized the SEC proposals as lacking the teeth to protect investors from broker conflicts of interest.

The SEC will vote on a final package of proposals that include four measures: Regulation Best Interest, a disclosure form delineating the differences between brokers and advisers, an interpretation of the standard of conduct for advisers, and an interpretation of the "solely incidental" language in the Investment Advisers Act that allows brokers to give some advice without registering as advisers and being subject to a fiduciary duty.

Under the SEC package, brokers and advisers will continue to be regulated separately, with advisers adhering to fiduciary duty as they currently do. Mr. Clayton has asserted that fiduciary principles have informed Reg BI, which will ensure investors receive a similar level of care whether they work with advisers or brokers.


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