Does the SEC's proposed Regulation Best Interest amount to a meaningful change in standards for broker-dealers, or is it really just a touched-up retread of FINRA's well-established suitability standard?
That question is emerging as a central element of the debate over the regulation, one that will animate the comments the SEC will be collecting from interested parties through Aug. 7.
"Our concern is that as introduced, the rule proposal may offer the appearance but not necessarily the reality of increased investor protection," Maureen Thompson, the CFP Board's vice president for public policy, said at an SEC committee meeting in Atlanta.
Thompson points to the CFP Board's own updated standards, which apply a fiduciary benchmark to all holders of the credential, regardless of the business model under which they operate. No such uniformity is to be found in the SEC's proposed regulation, which was drafted without using the term "fiduciary" and does not include a concrete definition of what constitutes a client's best interest.
"Under Reg BI 'best interest' is not clearly defined and leads us to wonder, is it the best interest standard under FINRA's suitability rules? Is it the fiduciary obligation under the Advisers Act? Or is it something else entirely?" Thompson says. "The term 'best interest' lacks a definition, and that results in a circular and unclear standard."
Instead of setting a uniform standard for brokers and advisors, the SEC's proposed rule would rely on disclosures to help investors delineate between the two models, "which past experience shows they won't be able to do," says Micah Hauptman, financial services counsel at the Consumer Federation of America.
Hauptman also objects to the lack of specificity around what types of broker conduct would be prohibited under the rule, suggesting that the regulation could simply amount to upholding the status quo, more or less.
"The best interest standard is vague and undefined, and depending on how it's interpreted, it could do little more than rebrand the existing FINRA suitability standard as a best interest standard," Hauptman said.
The view from Wall Street is very different.
A senior executive at SIFMA was on hand to roundly (though not uniformly) praise the SEC's rule, arguing that it would significantly enhance the current standards of conduct for broker-dealers.
The rule "not only clearly and significantly raises the bar from the current suitability standard under FINRA rules, but also incorporates the intended principles and goals of the former [Department of Labor] fiduciary rule that it is replacing," says Ira Hammerman, SIFMA's executive vice president and general counsel.
"Although the SEC does not use that particular F word — fiduciary — in its proposal, that does not mean that the SEC is proposing any less protective a standard," Hammerman says.
"Reg BI is essentially a fiduciary standard, as it includes both a duty of care and duty of loyalty elements," he adds. "But since investment advisors have long been held to a fiduciary duty, this new proposal seeks to maintain the distinction between BDs and IAs, while ensuring that both regimes are subject to the highest standards of conduct."
Moreover, the absence of a precise definition of best interest was no mistake, Hammerman argues. Just as the term "fiduciary" is not defined in the 1940 Investment Advisers Act, the SEC proposal envisions a principles-based approach to the best interest obligation, wisely avoiding an overly prescriptive definition, according to Hammerman.
SIFMA's broad support of the SEC's proposed rule is a marked departure from its unflagging opposition to the Department of Labor's fiduciary standard. That rule has been struck down by a court in a lawsuit jointly filed by SIFMA, and the Trump administration has shown no interest in defending it.
The financial services trade group does have some quibbles with the SEC's proposal, including concern that the definitions of what constitutes a retail customer and a material conflict of interest are too broad. It is also worried that the proposed restrictions on the use of the title "advisor" and "adviser" could create difficulties for brokers who go on to dually register as IAs and are struggling to build that side of the business.
But the rule would generally permit established business models in the brokerage sector to continue, whereas critics saw in the Labor Department rule a clear preference for the fee-based advisory model.
"Contrary to the approach taken by the DoL fiduciary rule, fee-based advisory accounts are not the end-all and be-all for all clients under all circumstances," Hammerman said. "Reg BI recognizes that brokerage accounts are the right fit for many investors where fee-based accounts simply are not."
But if that flexibility allows the brokerage model to press on with minimal changes, it also leaves the door open for persistent conflicts of interest, says James Allen, the CFA Institute's head of capital markets policy for the Americas. The principles-based framework the SEC is proposing would invite brokers to point to a fiduciary-like regulatory regime when the reality would be closer to the current disclosure-heavy suitability standard, Allen says.
"Instead of a definition, Reg BI imposes requirements on brokers, and we certainly appreciate the adage that actions speak louder than words, but we've experienced salespeople claiming a fiduciary mindset for years while delivering conflicted advice and products," Allen said. "We must fix this."
The SEC is seeking public comments on Regulation Best Interest through its website. When the Labor Department engaged in a similar public comment period for its proposed fiduciary rule, The Wall Street Journal found evidence that many comments that had been submitted were fake.