Now that the Department of Labor’s (DOL) fiduciary rule is officially dead, attention has now turned to the Security and Exchange Commission’s (SEC) proposed rule package, Regulation Best Interest. The same lobbyists that successfully blocked the fiduciary rule are now targeting the SEC's efforts to create a new standard for investment advice, requiring brokers to put their clients' interests first. If past efforts are any indication of future success, the SEC faces formidable opposition. (For more, see: DOL's Fiduciary Rule Officially Shelved.)
SEC Proposal Establishes 'Best Interest' Standard
The proposed SEC regulation, currently under a 90-day public comment period until Aug. 7, 2018, is designed to establish a “best interest” standard of conduct for broker-dealers and those associated with broker dealer firms when they are making recommendations about the sale of any security, or providing any investment advice to a retail customer.
The proposed regulation also attempts to clarify the fiduciary obligation that investment advisors are held to in all client interactions, introduces a new, required customer relationship summary (Form CRS) that details the “scope and terms” of the relationship, and restricts who can use the titles "advisor" and "adviser," a potentially misleading designation that could give clients the impression that a broker is held to a fiduciary standard. Professionals would be required to disclose, if not eliminate, all conflicts of interest.
Prevent Conflicts of Interest
Taken as a whole, the SEC's plan for reforming investment advice is intended to deter professionals who proffer investment advice from recommending investment products that are equivalent to other, less expensive products, but that pay a higher commission and bolster their overall compensation. The regulation would also extend who is obligated to act in the best interest of customers by applying the fiduciary standard to anyone who brokers retirement products, not just investment advisors.
Unfortunately, the SEC does not define “best interest” in its proposal, creating confusion about how the regulation will be enforced. The SEC's proposal states: "... we preliminarily believe that whether a broker-dealer acted in the best interest of the retail customer when making a recommendation will turn on the facts and circumstances of the particular recommendation and the particular retail customer." (For more, see: SEC Alt-Fiduciary Rule: "Regulation Best Interest.")
History of Successful Advocacy Efforts
The most visible opponent to the proposed SEC regulation is the National Association of Insurance and Financial Advisors (NAIFA). NAIFA, along with several co-plaintiffs including the American Council of Life Insurers (ACLI), the Financial Services Institute (FSI) and the Securities Industry and Financial Markets Association (SIFMA), was instrumental in overturning the DOL's fiduciary rule. Some organizations who fought the DOL's rule, such as FSI, have expressed support of the SEC proposal.
Diane Boyle, NAIFA's senior vice president of government relations, was cited in Financial Advisor magazine, claiming that the group’s advocacy efforts are successful because of their approach: "We leverage staff, constituent lobbyists and all three branches of government to protect our members and their customers.”
First Target is Disclosure Document (Form CRS)
NAIFA’s first target will be the Securities and Exchange Commission’s proposed customer/client relationship summary, Form CRS, in particular the section that prevents broker-dealers and their associates from using the title “advisor” or “adviser” under specific circumstances. It makes sense that they would begin here; most NAIFA members are not Registered Investment Advisors (RIAs) with a fiduciary duty to their clients. Instead, the majority are insurance agents and broker-dealer representatives who have historically been held to the less restrictive “suitability” standard. Before the SEC released its "Regulation Best Interest," brokers were only required to make recommendations that were considered suitable, but not necessarily in the their clients' best interest.
NAIFA’s position is that if its members are blocked from using the title “advisor” or “adviser,” it would effectively prevent them from offering advice, and their ability to serve low and middle-income clients would be restricted, creating more barriers to financial advice for those who need it the most. NAIFA lobbyists have already met with SEC Chair Jay Clayton, along with two SEC commissioners and staff, to argue NAIFA’s position. (For more, see: Charles Schwab: SEC's Proposed Disclosure Form Could Confuse Investors.)
FPA Could Be a Counterweight
A potential counterweight to NAIFA could come from the efforts of the Financial Planning Association (FPA), the primary professional organization for advisors who hold a CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. The CFP® board recently approved a new code of conduct that will become effective Oct. 1, 2019. The new code extends the fiduciary standard to all forms of financial advice from CFP® professionals.
Many predict that the SEC's Best Interest Regulation will effectively become a watered down fiduciary standard, and for this reason there is speculation that the FPA is preparing to sue the SEC. Frank Paré, FPA president, said in an interview with Financial Advisor that a “suitability-plus” standard for broker dealers could create a marketing advantage for financial advisors and CFP®s, but could also create confusion for investors. When asked about the possibility of a lawsuit, Paré said, “It’s too premature. But it’s a legitimate question.”
SEC Attempting to Understand Investor Expectations
As NAIFA begins its efforts to first allow broker dealers to call themselves advisors, and then further loosen conduct standards for all brokers, organizations like the FPA will likely keep applying pressure in order to ensure that the outcome of the SEC's Regulation Best Interest is to encourage a fiduciary standard, rather than a less strict “suitability-plus” standard that stands to benefit financial professionals and hurt individual investors.
In a press release from the SEC on June 29, 2018, Chair Jay Clayton announced plans to hold roundtable discussions with “Main Street investors” across the country in July. This will be an opportunity for investors to speak directly to Clayton and “share their views on key questions about their relationship with their investment professional.”
“Our proposed rules are intended to match our rules with investor expectations and it is crucial that we hear directly from the investors themselves on how we can best ensure that result," said Clayton.
Update: On July 10, 2018, a representative from NAIFA contacted Investopedia with this statement: “NAIFA supports a best interest standard for advisors and looks forward to providing any assistance we can offer as the SEC refines its proposal. The rule has not been finalized, so NAIFA has not yet taken a position either supporting or opposing it."