Today's vote was the culmination of a debate that's spanned nearly two decades over broker-dealers' standards of conduct and the impact of conflicts of interest on average investors.(Photo: Diego M. Radzinschi/ALM)
The Securities and Exchange Commission voted by a 3-to-1 margin to finalize four agenda items that include new standards of conduct for broker-dealers' recommendations to retail investors, known as Regulation Best Interest, and a new interpretation of investment advisers' fiduciary obligations.
SEC Chairman Jay Clayton. (Photo: Diego M. Radzinschi/ALM)
SEC Chairman Jay Clayton said the action by the SEC was long overdue.
“It became clear to me early during my confirmation process in 2017 that Commission action in this area would be both appropriate and timely,” Clayton said in his opening remarks prior to the vote.
The four-pronged rulemaking package is designed to align “reasonable investor expectations and the actual legal standards that apply to financial professionals,” address investor confusion over the different roles of brokers and advisers, and codify the increasingly complex regulatory framework of state and federal regulations, said Clayton.
Today's vote was the culmination of a debate that's spanned nearly two decades over broker-dealers' standards of conduct and the impact of conflicts of interest on average investors.
Under Reg BI, brokers will have four obligations to retail investors: disclosure, care, conflicts of interest mitigation, and compliance.
Reg BI will govern account recommendations, meaning the standards will have to apply to IRA rollover recommendations and distributions from workplace retirement plans. That addition was not specified in last year's proposed rule.
The care obligation requires all recommendations to be in retail customers' best interests, and requires a consideration of investment costs—but does not require the cheapest investments to be recommended.
The conflict of interest obligation requires brokers to mitigate or eliminate conflicts of interest, whereas the suitability standard simply requires that conflicts be disclosed.
The disclosure obligation requires all fees, costs, and conflicts to be documented to investors, and the compliance obligation requires firms to produce written policies to assure compliance with Reg BI.
|Lone dissent
The Commission's sole Democratic member, Robert J. Jackson, was the lone dissenting vote on each item, with Chairman Jay Clayton, and Republican Commissioners Hester Peirce and Elad Roisman voting to pass the rules.
SEC Commissioner Elad Roisman. (Photo: Diego M. Radzinschi/ALM)
One of the commission's seats was temporarily vacated when Commissioner Kara Stein, a Democrat and staunch critic of the regulations in proposed form, left the SEC in January.
The cornerstone of Commissioner Jackson and consumer advocates' critique of Reg BI is that it allows brokers to give conflicted recommendations on securities so long as the conflicts are disclosed.
Those corners have long lobbied for a uniform fiduciary standard to be applied to broker-dealers and investment advisers.
Clayton, Peirce, and Roisman underscored the need to balance investor protections and choice in the investment services marketplace.
“Some have been quick to demonize suitability, and now best interest, and lionize fiduciary,” said Roisman. “In the real world, broker-dealers and investment advisers provide distinct services. One model is not inherently better.”
“The falling number of broker-dealers is a trend we want to arrest, not exacerbate,” said Peirce.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
