The SEC voted 3-1 to approve Regulation Best Interest (Reg BI) and three related proposed regulations at an open meeting held June 5. Commissioner Jackson dissented.
As our readers and followers know, the SEC is moving ahead with its own fiduciary standard Rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published in the Federal Register in May 2018 three proposals to establish a uniform fiduciary standard, triggering a 90-day public comment period for all three that expired August 2018. The SEC received over 6,000 comments (3,000 of which were unique) on Reg BI and related materials (see SAA 2018-31 (Aug. 15) for our analysis of the thousands of comments received).
The Revised Regulatory Package
The revised package was accompanied by a Press Release containing a Fact Sheet, and the massive final rulemaking package. Chairman Jay Clayton stated that the regulations would: “(1) require broker-dealers to act in the best interest of their retail customers; (2) require both broker-dealers and investment advisers to state clearly key facts about their relationship, including their financial incentives; (3) reaffirm, and in some instances clarify, the fiduciary duty owed by investment advisers to their clients; and (4) more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser subject to registration under the Advisers Act.” (ed: This last item -- a thoughtful response to the D.C. Circuit’s 2007 abrogation of the “solely incidental” exception in FPA v. SEC -- is a new element of the Reg BI package and bears reader attention.) In his prepared remarks, Statement at the Open Meeting on Commission Actions to Enhance and Clarify the Obligations Financial Professionals Owe to our Main Street Investors, Chairman Clayton states that the Commission considered public comments and made changes that “elevate, enhance and clarify these obligations [of financial professionals] in a comprehensive manner.”
One Size Does Not Fit All
Chairman Clayton noted that the differences between how BDs and RIAs “interact with their customers and clients, make it clear that a ‘one size fits all’ approach to regulating standards of conduct for financial professionals presents significant risk.… Put simply, this would be a loss for our Main Street investors. I firmly believe we can enhance the obligations of financial professionals for the benefit of our Main Street investors without adopting such a ‘one size fits all approach.” The amended Reg BI proposals fell into these main areas: Account Recommendations; Disclosure Obligation; Care Obligation; Conflict of Interest Obligation; and Compliance Obligation.
DOL Fiduciary Rule Was Considered
The Commission also considered lessons learned from the now-vacated Department of Labor (“DOL”) Fiduciary Rule for those providing retirement investment account advice, especially investor confusion between the roles played by broker-dealers and investment advisers: “The development of the approach before us also benefited from our consideration of … the adoption, and subsequent vacating of, the DOL Fiduciary Rule, which would have applied a fiduciary standard -- different from the fiduciary standard under the Advisers Act -- to persons who provide investment advice or recommendations with respect to ERISA plan assets or individual retirement accounts in a wider array of advice relationships than under the previous regulation. While our actions today include many elements that are similar to the DOL Fiduciary Rule, including the enhancements to the standards of conduct required of broker-dealers and the disclosure requirements of Form CRS, the initial implementation of the DOL Fiduciary Rule illustrated that our concerns for investor access, choice and cost are not theoretical.”
Commissioner Robert L. Jackson, Jr. (Democrat) issued a blistering dissent, commenting: “Rather than putting investors first, today’s action sadly does not…. The law does not compel the result my colleagues seek today.” Hester M. Peirce (Republican) voted in favor, stating: “The balance we have struck is a good one.” After posing several questions to staff, she acknowledged that there was still work to be done, and urged that the public review thoroughly the package. Commissioner Elad L. Roisman (Republican) “supported each of the staff’s four recommendations,” although he noted that there was more work to be done “especially where more guidance and clarity is needed.” Chairman Clayton was also a “yes” vote.
Swift Constituent Reaction
Constituent groups reacted swiftly to the Commission's vote (see this Financial Advisor IQ story from June 5 containing numerous comments). For example, statements issued by the Consumer Federation of America and PIABA were negative, while SIFMA supported “the key investor protection elements of the rule” in a June 5 Statement. Chairman Clayton preemptively addressed critics in his opening remarks: “You may hear that Regulation Best Interest does not truly enhance the broker-dealer standard of conduct beyond existing suitability obligations, that it can be satisfied by disclosure alone, or that we are doing a disservice to investors by calling it a ‘best interest’ standard. This is simply not true -- you will hear from the Division of Trading & Markets specifically how the rule goes significantly beyond existing broker-dealer obligations. To be clear, Regulation Best Interest cannot be satisfied through disclosure alone.”
And Preemption of State Fiduciary Laws or Regs?
We’ve reported several times that some States (e.g. Maryland, Nevada, Connecticut and New Jersey) have moved ahead with their own fiduciary rules or laws. Each time, we’ve queried the potential preemptive effect of the SEC’s eventual rule. Reg BI addresses this issue directly: “We note that the preemptive effect of Regulation Best Interest on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law. We believe that Regulation Best Interest, Form CRS, and the related rules, interpretations and guidance that the Commission is concurrently issuing will serve as focal points for promoting clarity, establishing greater consistency in the level of retail customer protections provided, and easing compliance across the regulatory landscape and the spectrum of investment professionals and products.” A footnote observes that “the preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.”
The SEC published on its Website the revised Reg Best Interest, the Final Rule - Form CRS Relationship Summary and Form ADV Amendments, forms, and interpretations (Standard of Conduct for Investment Advisers and Broker-Dealer Exclusion). These items will next be published in the Federal Register. The rules and forms will be effective 60 days after publication, while the interpretations will be effective immediately upon publication. Also, “by June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.” The SEC will be “rolling out a Main Street investor education campaign designed to help retail investors understand key differences between broker-dealers and investment advisers, and to help them decide whether working with one of these types of financial professionals is right for them.” Among the features will be educational videos; at least one retail investor event this summer; a dedicated landing page; and a chart providing the Rules’ key components.
(ed: *The Commission was short-staffed due to the vacancy created by the January 2019 departure of Kara M. Stein. President Trump on April 2nd nominated Democrat Allison H. Lee to a five-year term as SEC Commissioner, but the Senate has not yet acted. **FINRA was mentioned favorably several times. ***The Commission has established a dedicated email address: IABDquestions@sec.gov. ****As reported previously, the DOL has updated its Spring Regulatory Agenda to indicate that its own final fiduciary standard rule will be proposed in December 2019. *****Here’s a Bates Group analysis of the SEC meeting and vote on Reg BI.) (SAC Ref. No. 2019-22-01)
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