Securities and Exchange Commission chairman Jay Clayton is marketing the agency's recently released investment advice reform proposal as an effort to harmonize investment adviser and broker standards — an assertion that is drawing sharp disagreement from fiduciary advocates.
The SEC's new broker regulation would prevent brokers from putting their own financial interests ahead of those of their customers and require them to disclose and eliminate or mitigate conflicts of interest.
Currently, brokers operate under a suitability rule that requires them to sell investment products that meet a clients' objectives but allows them to select those that give the broker the highest revenue.
"By raising the conduct standard applicable to broker-dealers, we are applying consistent, fiduciary principles across the spectrum of investment advice. In a word: harmonization," Mr. Clayton said in a
May 2 speech in Philadelphia. "Broker-dealers will be, and investment advisers already are, required to act in the investor's best interests. I believe the outcomes in both cases should be the same."
The
proposal maintains separate regimes for brokers and registered investment advisers, who currently adhere to a fiduciary standard and must act in their clients' best interests.
Fiduciary advocates resist Mr. Clayton's assertion that the standards are converging.
"It seemingly allows the [broker-dealer] salesperson to sell higher-priced versions of products, ones that pay the broker more commission and products that ill-serve retirement savers, just as long as they meet suitability and the B-D discloses any of those cost and financial-incentive conflicts," said Kurt Schacht, managing director in New York for the CFA Institute. "That seems more like caveat emptor than fiduciary harmony to us."
Knut Rostad, president of the Institute for the Fiduciary Standard, cautioned that the SEC proposal is obscuring where the loyalties of brokers and advisers lie: the former with the firm, the latter with the client.
"This is another big step to gloss over how RIAs and B-Ds were created to serve different masters," Mr. Rostad said. "These differences remain. To suggest otherwise is to miss a big point. RIAs should think, 'Houston, we have a problem.'"
Ron Rhoades, director of the financial planning program at Western Kentucky University, said the SEC proposal hews too closely to recommendations from the brokerage industry that would allow brokers to hold themselves out as "trusted advisers but not be subject to a true fiduciary standard."
"The 'best interests' proposed standard will just further confuse an already confused public as to who they can really trust," Mr. Rhoades wrote in an email.
The SEC proposal falls short of the Labor Department's fiduciary rule, according to Kate McBride, the founder of FiduciaryPath, a fiduciary consulting and certification assessment firm.
The DOL rule, which was partially implemented last summer, is on the verge of death, after the 5th Circuit Court of Appeals
denied petitions by AARP and three states to appeal a March 15 split decision to strike down the rule.
Ms. McBride pointed to the DOL rule's impartial conduct standards, which require brokers in retirement accounts to act in their clients' best interests, charge no more than reasonable compensation and disclose material conflicts of interest. She said they reflect a "true fiduciary standard" based on trust law.
"It's commendable that the SEC is trying to raise the standard for brokers, but it's not a fiduciary standard," said Ms. McBride, a member of the Committee for the Fiduciary Standard. "It's not there yet. It is not the same standard as the DOL proposed, even though they're using the same words."
In a
speech Monday, the director of the SEC Division of Investment Management, Dalia Blass, defended the best-interest regulation by saying it would, for the first time, impose a best-interests standard on broker recommendations to clients.
"These obligations are key enhancements that cannot be satisfied by disclosure alone, that place greater emphasis on the importance of costs and financial incentives, and that could be directly enforced by the commission," Ms. Blass said.
