Preliminary Reactions to SEC’s “Best Interest” Standard Proposal
April 19, 2018 | James Sprow | Blue Vault
As expected, reactions to the SEC’s proposed standard of conduct or fiduciary rules pertaining to brokers’ relationships with clients met with mixed reviews. The SEC voted 4-1 to pass the standard of conduct proposal and its 1,000 pages of rules, but critics say that it doesn’t go far enough. And based on the comments from the commissioners who voted to pass the proposal, it will probably be further revised after a 90-day comment period.
In 2016, Obama’s Labor Department sought to extend a fiduciary obligation to brokers who offer retirement advice, but those rules were struck down by a federal appeals court. The Trump administration asked the SEC to take up the task of crafting fiduciary rules for broker-dealers and the proposal is the product of weeks of discussion among the agency’s commissioners and months of input from investor advocates and industry groups. Jay Clayton, the SEC Chairman appointed by President Trump, led the SEC’s efforts to address legal and regulatory uncertainties triggered by Labor’s controversial rules.
SEC Commissioner Kara Stein, a Democrat who was the dissenting vote, was quoted in a Think Advisor article on April 18. “This was truly a Herculean task done in a very short period of time.”
Stein stated that the proposal “fails to provide comprehensive reform,” adding that “the emperor has no clothes” in establishing a fiduciary duty for brokers by instituting the proposal, called Regulation Best Interest.
“For at least the last decade, investors have been asking for a fiduciary standard for brokers; unfortunately [the proposal] squandered the opportunity for us to act in the best interest of investors,” Stein said.
The proposed regulation, Stein said, “reaffirms that broker-dealers have to meet their suitability obligations” and merely “requires and mandates a few disclosures.”
Stein added: “Because there is no definition of best-interest standard, the name [of the new rule] is confusing. It’s more appropriate to call this Regulation Status Quo.”
In the same Think Advisor article, SEC Commissioner Hester Pierce, a Republican, countered Stein’s assertion, saying the emperor “will wear more clothes” under the new standard.
While Pierce said she also had concerns about the proposals, she sees them as an “excellent start” to reform.
SEC Commissioner Michael Piwowar, a Republican, stated that the Regulation Best Interest proposal “is a solid building block,” as “it imposes a new best-interest standard.”
While he noted that he has “some misgivings about the three proposals,” Piwowar said that he supported putting them out for comment. “No longer can people say the SEC needs to do something about this” fiduciary issue.
Piwowar said that he wanted to hear comments on whether Regulation Best Interest “will raise compliance costs” for broker-dealers. “Despite these concerns, I’m supporting this proposal.”
SEC Commissioner Robert Jackson, a Democrat, stated that he was “reluctantly” supporting the proposals but could not support them as written “today as final agency rules.”
The “need for SEC action has been even more urgent,” Jackson said, since the Labor Department’s fiduciary rule has been stymied by the current administration.
SEC Chairman Jay Clayton said in his final statements before the vote that his “colleagues raise very important points” that address “the complexities that we face as we move forward.”
A Bloomberg article on April 18, noted that trade groups representing brokers, financial firms, mutual fund companies and insurers said they were generally pleased with the SEC proposal.
“This package of proposals has the potential to be a real win for all types of investors, from the young family starting to invest for the future to an older investor approaching retirement,” David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement.
The chamber was one of a number of associations that sued to overturn the Labor Department’s fiduciary rule. A federal appeals court vacated the regulation in a March decision, and it’s unclear whether the department will appeal.
The proposal will now go out for a 90-day comment period.
Sources: Think Advisor article by Melanie Waddell, April 18, 2018; Bloomberg article April 18, 2018
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