SEC Votes on Its Own Proposed Fiduciary Rule

The Securities and Exchange Commission (SEC) on Wednesday, April 18, voted 4-1 on a proposed fiduciary rule that sets standards of conduct, additional disclosure requirements and restrictions on advisor/broker titles. The vote comes a month after the U.S. 5th Circuit Court of Appeals struck down a hotly contested fiduciary rule by the Department of Labor (DOL) that was already in effect but on hold until this July 1.

sec-issues-fiduciary-standard-rule

SEC Chairman Jay Clayton

Eight years ago, Congress authorized the SEC to establish such a rule, but the DOL beat them to the punch with its 2016 standard.

In a statement released after the vote, the SEC explained:

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

“The framework of our proposal is straightforward,” SEC Chairman Jay Clayton said at Wednesday’s meeting. “It reflects a multi-pronged effort to fill the gaps between investor expectations and legal requirements, thereby increasing investor protection, and the quality of advice, while preserving investor access and investor choice, recognizing that access and choice are driven by what is available and how much it costs.”

The DOL rule actually placed stricter requirements on brokers, specifically those who market retirement plans, mandating that they put their clients’ best interest first (that is, not the broker’s commission to be earned).

Specifically, the newer SEC proposal requires that brokers disclose all “key facts” about potential conflicts and mandates that they have a “reasonable basis” to conclude investment products are in their clients’ best interest, the agency said in a statement. It would also require that firms note and mitigate “material conflicts of interest” related to financial incentives.

The proposal, which has not been released to the public yet, directs brokers to develop a disclosure form, not to exceed four pages, that reveals to their clients pertinent information such as their services, fees and standards. To avoid confusion, the rule also bars brokers from using the title of “advisor” or “adviser.”

Commissioner Kara Stine, a Democrat, cast the lone dissenting vote, though others voiced reservations and hoped the public commentary period would produce needed improvements.


NOTE: The details in this blog are provided for informational purposes only. All answers are general in nature and do not constitute legal advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The author specifically disclaims any and all liability arising directly or indirectly from the reliance on or use of this blog.
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