After years of debate over the Department of Labor’s fiduciary rule, and a nascent movement of states adopting their own fiduciary standards, the SEC has finally issued the first proposal of its long-awaited “Advice Rule” to reform the standard of conduct for broker-dealers, after being authorized under Section 913 of Dodd-Frank nearly 8 years ago to harmonize the regulation of brokers and investment advisers with a uniform standard.
As it turns out, though, the SEC’s proposal is not actually a uniform standard that would require brokers to be fiduciaries, but instead would only partially lift the conduct standards for broker-dealers, with a new “Regulation Best Interest” requirement that would obligate brokers to act in the best interests of their customers when making an investment recommendation… but only at the time they actually make the recommendation. And not at all if the broker is implementing recommendations that were crafted while wearing his/her investment adviser “hat” under a dual-registered B/D-RIA firm.
To help further clarify the nature of the relationship between customers and their brokers, and investment advisers and their clients, given that the SEC is not harmonizing fiduciary regulation for investment advisers and brokers, the regulator also proposed establishing a new Disclosure Form CRS – short for customer/client relationship summary – which would provide a “simple, plain language” 4-page explanation of the consumer’s relationship with the broker or adviser, albeit with wording that will likely be hotly debated in the coming year.
In addition, the SEC’s Advice Rule would formalize an RIA fiduciary’s expectations under the Duty of Care and the Duty of Loyalty, proposes several new potential requirements for RIAs where their standards are actually lower than broker-dealers (in particular, for investment adviser representatives to have a Continuing Education obligation, and for RIAs to potentially have basic Net Capital requirements to ensure they can make good to clients in the event the firm must be liquidated and unwound), and raises the question of whether it’s finally time for “title reform” by proposing that brokers would no longer be permitted to use any title with the word “advisor” or “adviser” (though dual-registered brokers would still be permitted to do so given the RIA “adviser” hat).
Ultimately, the good news of the SEC’s Advice Rule proposal is that it does aim to at least partially lift the standards for brokers, with an aim to further clarify the nature of the broker’s relationship with the customer (and how it differs from an advisor’s relationship with its clients). Yet at the same time, introducing a “Regulation Best Interest” may be so on-the-nose that consumers will actually just be more confused about the difference between a “Best Interests” standard for brokers and a “fiduciary” standard for RIAs… which the SEC defines as the RIA being obligated to act in the Best Interests of its clients, too. And by exempting dual-registered brokers from both the obligations of title reform, and Regulation Best Interest itself, it’s not entirely clear if the SEC is really aiming to clarify the differences between brokers and investment advisers… or to simply induce all broker-dealers to launch corporate RIAs as a safe harbor for their advice-related activities to avoid ever really facing greater scrutiny of the broker-dealer model and how their advice is implemented in the first place?
source https://www.kitces.com/blog/regulation-best-interest-sec-advice-rule-advisor-title-reform-disclosure-form-crs/?utm_source=rss&utm_medium=rss&utm_campaign=regulation-best-interest-sec-advice-rule-advisor-title-reform-disclosure-form-crs
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