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Advisor? Broker? SEC proposes vote on fiduciary standards to help clear up confusion

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The SEC plans to move forward with a proposal to impose new standards of care for investment advisors and broker-dealers who work with retail investors, according to a notice from the commission.

At an open meeting on Wednesday, April 18, the commission will vote on three matters that would begin the process of reshaping the rules for advisors, a long-anticipated initiative that Chairman Jay Clayton bills as a cornerstone of his program to improve advice for the Main Street investors he has dubbed "Mr. and Mrs. 401(k)."

"The importance of investment advisors and investment companies to our investors and particularly our retail investors has increased dramatically," Clayton said at an SEC event on Thursday.

Commissioners will vote on three separate items at next week's meeting, each marking only the beginning of a potentially lengthy administrative process.

One question before the commissioners will be whether to propose a rule that would codify "a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer."

The details of that proposal will be pivotal, especially in light of the uncertain fate of the Department of Labor's fiduciary initiative. The second phase of that rule, governing advisors providing retirement advice, has been delayed by the DoL, which has been navigating legal challenges to the regulation. A federal court struck down the rule last month while a separate challenge is pending, stoking speculation that the matter could land before the U.S. Supreme Court.

Meantime, at the SEC, investor advocates can be expected to press for a rigid fiduciary standard that will stress mitigation and elimination of conflicts of interest over disclosure.

Already, news of the votes next week — which only offered vague outlines of the proposal — has angered some proponents of a strong fiduciary standard.

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, sees the proposal as an effort "to dramatically weaken" the DoL's standard, and calls the disclosure provisions the SEC is proposing "virtually meaningless."

"This is not a good development for retail investors," Stoltmann says. "Investors are confused already and a disclosure that nobody reads likely won't be the least bit useful."

On the other side, broker-dealers and their allied trade groups are likely to push back against any proposal that would threaten to disrupt entrenched business models, as they did with the Department of Labor's fiduciary proposal.

The commissioners will also consider whether to move forward with a proposal to require advisors and brokers to provide retail clients with a brief — and presumably plain-English — summary of the relationship. That document would enumerate the advisors' responsibilities, likely including language about obligation to act in the client's best interests.

Additionally, the commissioners will vote on whether to propose an interpretation of the standard of conduct for investment advisors.

Taken together, those three proposals aim to lessen confusion among investors who might not understand the different responsibilities that advisors and brokers face in an uneven regulatory landscape for professionals who often provide fundamentally similar services.

"A major goal of this initiative is to address investor confusion and lack of clarity among investors regarding the services they receive from investment advisors and broker-dealers," said Paul Cellupica, deputy director of the SEC's Division of Investment Management.

"Bringing clarity to this space is very important," added Dalia Blass, director of the investment management division.

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