Fiduciary watchers say problems with SEC advice rule portend long slog

Potential pitfalls include lack of detail on best-interest standard, demarcation between sales and advice.

An investment advice reform proposal released by the Securities and Exchange Commission last week has shortcomings that will result in a long slog to final regulations — or perhaps a journey that stops short of that destination, a leading fiduciary advocate said Wednesday.

The SEC voted 4-1 on April 18 to release the investment advice package for public comment. Even commissioners who backed it raised long lists of concerns about the measures, which include a best-interest standard for brokers, new disclosure documents for brokers and investment advisers, and interpretative guidance for advisers.

The package blurs the distinction between broker and investment adviser standards of care and fails to clarify the difference between sales and an advisory relationships, said Blaine Aikin, executive chairman of Fi360 and Cefex, fiduciary training, software and certification organizations.

“There are serious problems in the rule,” Mr. Aikin said at the Fi360 annual conference in San Diego. “What we foresee ahead is a long and arduous path for the rule to be implemented.”

After the 90-day comment period, the SEC may take months working on modifications to the proposal. The best-case scenario for a final rule is sometime in 2019 with a transition into 2020, Mr. Aikin said.

“There is a reasonably good chance the rule will never fully come to pass,” he said.

The rule contains what is a called a Regulation Best Interest, which is designed to raise the advice standard for brokers. Brokers currently must sell products that are suitable for an investor, but they are allowed to recommend high-fee investments that produce the most revenue for themselves.

Joe Borg, director of the Alabama Securities Commission, said the SEC proposal is too vague about what best-interest means in the broker context.

“You’ve got to figure out a way to raise the current suitability standard in some sort of meaningful way, and I don’t think it does that,” Mr. Borg, president of the North American Securities Administrators Association, said at the Fi360 conference.

The SEC proposal has the same “basic structure and framework” of a revised annuity suitability rule that the National Association of Insurance Commissioners is drafting, said Jolie Matthews, NAIC senior health and life policy counsel, at the Fi360 conference.

But the SEC and NAIC are struggling with the details, according to Ms. Matthews.

“How is that best interest enhancing suitability?” she said.

Best interest is a term usually associated with investment advisers, who owe a fiduciary standard of care to their clients and must act in their best interests. Even though the SEC rule kept broker and adviser standards separate, they brought them closer together in a way that could be confusing to investors, Mr. Aikin said.

“Having a fiduciary best-interest standard and a non-fiduciary best-interest standard is problematic and contrary to the goal of clarity,” he said.

One of the most contentious points in the debate over standards of care involves delineating a sales pitch from investment guidance. The SEC rule fails to provide an answer, according to Mr. Borg.

“I still need a clarification on the difference between a sales recommendation and investment advice, and I don’t see that in the rule in its current form,” he said.

Perhaps the SEC will arrive at the conclusion after sifting through what is likely to be a mountain of comment letters on the proposal, which poses dozens of questions for those commenting to consider.