Earlier this year, the SEC proposed its own long-awaited overhaul of the regulation of broker-dealers and investment advisers. At the time, the Department of Labor’s fiduciary rule was still the law of the land, and the pressure was on the SEC to “harmonize” – both the SEC’s regulation with the DoL’s version, and to close what has long been perceived as a concerning gap in the standards of conduct that apply to the “suitable” advice delivered by brokers versus the “fiduciary” advice of (registered) investment advisers.
And while the DoL fiduciary rule has since been struck down, consideration of the SEC’s advice rule is still, thus far, proceeding as planned, with a controversial overhaul of the standards of conduct for broker-dealers that would require them to act in the “best interests” of their customers when making a recommendation (but not as a fiduciary at all times in their relationship with clients) under the new Regulation Best Interest, along with a new Form CRS (Customer/Client Relationship Summary) to better describe the nature of the broker or investment adviser’s relationship with the consumer, and a potential limitation on the use of the “financial advisor” title by at least the brokers at standalone broker-dealers who have no RIA affiliation.
Yet, while the SEC’s efforts to lift the standards of advice being delivered by brokers is laudable, arguably its effort to do so by applying Regulation Best Interest to the “pay as you go” episodic or transaction advice of brokers inappropriately redefines the Investment Advisers Act of 1940 itself… which knowingly subjected broker-dealers to a lower standard than that of investment advisers specifically because brokers are not supposed to be in the business of advice (ongoing or episodic) in the first place, and were only permitted to provide advice to the extent that advice was/is “solely incidental” to the sale of brokerage products and services. In other words, the problem is not that broker-dealers are giving advice without being subject to a fiduciary standard under FINRA regulation; the problem is that broker-dealers giving such advice are required to register as investment advisers, and if they did, they would already subject them to the fiduciary standard that applies to registered investment advisers, rendering the entire Regulation Best Interest proposal moot anyway!
In this context, it is especially concerning that the SEC’s proposals appear to undermine the clear choice between sales versus advice that Congress intended when establishing the ’40 Act in the first place. After all, it’s hard to imagine that consumers will understand the sales-versus-advice distinction when the proposed Form CRS disclosure states that consumers may receive advice from a broker on a transactional or episodic basis or from an investment adviser on an ongoing basis (when the SEC already requires advisors providing transactional or episodic advice in the form of hourly and project planning fees to become investment advisers anyway), and it is unclear how any consumer could understand their choices given the Form CRS disclosure that broker-dealers “must act in your best interest and not place our interests ahead of yours” while investment advisors “are held to a fiduciary standard” which the SEC defines as the obligation to “act in the best interest of the client” as well!
Similarly, while the SEC’s advice rule proposes to reduce consumer confusion by limiting the use of the “financial advisor” term by standalone broker-dealers and their registered representatives, it continues to allow hybrid advisors to use the label, knowing full well that at least a portion of the advisor’s services will not be in his/her capacity as an advisor but as a salesperson. In other words, advisors are explicitly being granted permission to market their services as “advice” and implement that advice without being subject to the appropriate standard for advice, without any requirement to explain to the consumer when the advice relationship ended. For which the SEC suggests consumers might be “confused” by a requirement that the advisor clearly disclosure and use proper labels for the “hat” being worn… instead of recognizing that the confusion stems from the nature of the dual-hatted advice-and-also-sales relationship in the first place, for which clear use of titles at all times alleviates the confusion!
The bottom line, though, is simply to recognize that the real problem in the marketplace for financial advice today isn’t that broker-dealers are giving advice without being subject to the fiduciary duty that has always been applied to advice relationships of trust and confidence, or that the application of a fiduciary duty to the broker-dealer model could limit choice (and thus why a lower Regulation Best Interest standard is needed instead). The real problem is that Congress articulated in the Investment Advisers Act of 1940 that consumers should have a choice – between brokerage sales and investment advice – which the SEC’s Regulation Best Interest proposal not only fails to honor, but risks undermining to the detriment of advisor competition in the marketplace and the elimination of clear choices for consumers.
In any event, though, whether you agree or disagree, the time to do so is now, as the 90-day Public Comment period on the SEC’s proposals ends on August 7th. So, if you haven’t submitted your own comments to the SEC about why Regulation Best Interest and Form CRS should, or shouldn’t, move forward… now is the time to make your voice heard!
source https://www.kitces.com/blog/public-comment-letter-sec-advice-rule-regulation-bi-form-crs/
No comments:
Post a Comment