You might say, „Sure, he`s a consultant.“ But until now, almost anyone could claim to be a financial advisor – even brokers who weren`t required to abide by fiduciary standards. Our rules and interpretations benefit from the Commission`s long history of regulating dealers and investment advisers, the extensive experience and expertise of our staff, our analysis over many years of previous efforts to modernize and improve regulation in this area, and the many thoughtful and other comments we have received on our proposals. [2] There is no doubt that these actions, individually and collectively, will greatly benefit investors on Main Street. Brokers register with the Financial Industry Regulatory Authority (FINRA) – a private sector group, not a government agency like the SEC. FINRA applies a „suitability rule“ for dealers, which means that they must have reasonable grounds to recommend a particular investment product, but they do not always have to act in the best interests of their clients. The word „fiduciary“ is so powerful that some people seem to assess the best interests of our proposed regulations solely on the basis of the absence of that word in the new standard. If we don`t call the trustee standard, it doesn`t have to be good in the minds of some. Instead, we used a different term, but one that also gives me food for thought – „best interest“. On the other hand, the Securities Industry Financial Markets Association (SIFMA), which represents the brokerage industry, defended the BI regulation, insisting that it provides for stricter regulation than the FD regulation. In a press release, Kenneth E. Bentsen, Jr.: „Even the so-called fiduciary standard under the Investment Advisers Act does not include the obligation to eliminate or mitigate conflict. It is undeniable that this rule will directly enhance investor protection and contribute to greater professionalism among financial service providers,“ 22 Proposed Rule 15l-1 of the Securities Exchange Act of 1934 (17 CFR 240.15L-1) (emphasis added). (back) In an interview with CNBC`s „Squawk Box“ on Thursday morning, Clayton said there are all sorts of „fiduciary“ duties, but focuses on the fiduciary duty of an investment advisor.
A bigger concern for me is that the best interest standard suffers from the same problem as the fiduciary standard – a term that is wonderful for marketing purposes, but potentially misleading to investors. Just as the term „fiduciary“ has been used to encourage investors not to ask questions about their financial professional, the term „best interest“ risks becoming a term that encourages investors to simply rely on their best interests. If we keep the term, we – as regulators – and you – as advisors and brokers – should strive to encourage investors to look beyond the nice terms to look beyond the substance of what their financial professional does or does not do for them and how much they charge. As many of you know, the Securities and Exchange Commission adopted a set of rules and interpretations in June that will improve the quality and transparency of retail investors` relationships with dealers and investment advisers. Importantly, they balance legal requirements and mandatory disclosures for dealers and investment advisors with investors` reasonable expectations. These actions do not attempt to promote any type of service or relationship. Rather, they are intended to enhance investor protection while maintaining access for Main Street investors – both in terms of choice and cost – to a variety of investment services and products. The FD regulation, as it was called, was originally scheduled to run from April 10, 2017 to January 1, 2018, but was rejected by the Trump administration and SEC Chairman Jay Clayton.
On June 21, 2018, the U.S. Court of Appeals for the Fifth Circuit formally struck down the rule and effectively ended it. The SEC`s new regulations change the way brokers can identify themselves and are intended to provide clarity for consumers seeking help managing their assets. Here`s what you need to know. „The best interests of regulation were the right approach for the SEC. That`s better than many alternatives, especially what the DOL escrow rule would have been,“ says Mark Quinn, director of regulatory affairs at Cetera, a vast network of more than 7,000 broker-dealers. It explicitly recognizes the value that fee- and commission-based models have for clients, depending on their situation. The Best Interest regulation aims to keep brokers at a higher level. The new regulation requires dealers to cease to call themselves advisors if they do not operate under a fiduciary standard. In addition, it imposes four obligations on them: In early 2018, the Securities and Exchange Commission („SEC“) issued a series of proposals known as Regulation Best Interest („Regulation BI“) to raise the standard of conduct for broker-dealers. Despite thousands of public comments, rule revisions, and a lawsuit against its implementation (which is still ongoing), compliance with this new regulation came into effect on June 30, 2020.
As a result, it may be easier for financial professionals to avoid becoming fiduciaries, said Jason C. Roberts, president and CEO of the Pension Resource Institute, an advisory firm for banks, brokerages and consulting firms. Brokers can circumvent the fiduciary standard by structuring their interactions with clients as educational, he explained, and do not respond to what could be considered advice. Companies must provide information about their relationships and services, fees and costs, conflicts of interest, standards of conduct, and whether or not the company and its financial professionals have a legal or disciplinary history. This disclosure will be subject to a standardized question and answer format to promote comparability between companies. 16See Policy Statement 3 on Part 2 of the ADV Form (which states that an advisor`s disclosure obligation „requires the advisor to provide the client with facts sufficiently specific to enable the client to understand [the advisor`s] conflicts of interest and business practices in which [the advisor] is involved and to give or withhold informed consent to such conflicts or practices“). (back) The SEC`s Best Interest Regulation (Reg BI) under the Securities Exchange Act of 1934 establishes a standard of conduct „in the best interest“ for broker-dealers and related persons when making a recommendation to a retail client for securities transactions or investment strategies involving securities, including account type recommendations.
