SEC best interest proposal has 'severe problems'

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WASHINGTON – The SEC's proposal to raise standards for brokers and to regulate advisor titles has good intentions but "severe problems" that need to be fixed, says Maureen Thompson, vice president of public policy at the CFP Board.

"Brokers would not be held to a fiduciary standard. They would be held to a best interest standard, which the SEC does not really define," Thompson says.

Maureen and other fiduciary advocates offered a sharp critique of the proposed rules during a panel discussion at the Society for Advancing Business Editing and Writing’s annual conference, raising issues such as potential loopholes in the commission's bid to regulate who can call themselves a financial advisor.

Their comments were yet another sign that the SEC's proposal is receiving a lukewarm response from fiduciary advocates and will likely face sharp criticism as it moves forward. On Wednesday, FPA leaders expressed similar criticism, noting that the SEC proposal would not regulate who could use the term “financial planner.”

"One of the fears could be that people might use ‘financial planner’ if they can't use ‘financial advisor’," Shannon Pike, 2018 FPA Chair, told Financial Planning ”And ‘financial planning’ is in vogue. Look at the people in the BD world who like to use it. We certainly are going to talk very heavily within our ranks about that."

The SEC is current accepting public feedback on its proposed rules, issued earlier this month, eight years after the 2010 Dodd-Frank Act authorized the commission to create a fiduciary standard. Meanwhile, AARP and three state attorneys general are petitioning a federal court to step into the Department of Labor's place and appeal a recent appeals court ruling that vacated the department's fiduciary rule.

Regulators have faced increasing pressure to update standards of conduct for brokers and advisors in part because the business has changed dramatically in recent decades.

"In 1940, effecting a securities transaction required a skilled professional. Today, I can do that with a click of a button," says Barbara Roper, director of investor protection at the Consumer Federation of America, referencing the Investment Advisers Act of 1940. "No one pays prices for someone to effect a transaction. They pay that because they are getting advice."

Of course, the industry's evolution extends to professional titles as well, forming a point of tension between traditional brokerage firms that increasingly offer holistic financial planning, their RIA counterparts and consumer advocates.

"Brokers aren't called brokers anymore; they're financial advisors," Roper says. "And they don't have to do what 90% of investors think they are required to do, which is act in their clients’ best interest."

Critics say SEC efforts to regulate the “financial advisor” title could produce a game of whack-a-mole, as non-fiduciary financial professionals adopt other terms intended to blur the lines: financial consultant, wealth manager, private wealth advisor, retirement specialist and more.

The SEC may also face criticism around a requirement that brokers and advisors mitigate – but not necessarily eliminate – conflicts of interest. Roper says this part of the rule could be a boon to investors, but only if it’s clearly defined.

"Properly implemented, this could be helpful. The problem is that they have not defined what mitigating is, what the goal is, and against what standard they would measure whether the mitigation was adequately designed," Roper says.

And criticism may extend to how the SEC defines “best interest” itself.

"For those of us who have worked on this issue and who have encouraged investors to look for a fiduciary, we were told you have to use more simple terms. We said, 'Great, fiduciary means that advisors have to work in your best interest.' Now we have a rule that defines best interest [but not in a fiduciary way]," says the CFP Board's Thompson.

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Fiduciary standard Fiduciary Rule Regulatory reform Regulatory actions and programs Barbara Roper SEC CFP Board Consumer Fed of America DoL