SEC Panel OKs Tentative Advisor Standard

SEC commissioners split along party lines today over a package of new rules governing investment advice, but all cited a lack of specifics in the rules despite its 1,000-plus pages.

Democrats Kara Stein and Robert Jackson sharply criticized the proposals, while Republicans Michael Piwowar, Hester Peirce and Chairman Jay Clayton generally praised the package as a positive step forward. The proposal had not been released as of this evening.

The panel voted 4-1 to release the rules for public comment, with Jackson siding with the majority. A 90-day public comment and public hearing period will take place before a final rule is formed and adopted.

The proposal calls for a best interest standard and calls on brokers to establish policies and procedures to identify and avoid conflicts. A new "customer relationship summary" disclosure would enhance the investor's participation in the relationship with their broker, SEC staff said.

Additionally, the titles "advisor" and "adviser" would be more strictly defined. What is nowhere to be found is a private right of action giving investors the right to sue, a controversial component of the Department of Labor fiduciary rule.

After SEC staff presented the rules, Stein went first and dismissed the package as a lightweight attempt at regulation.

"The proposals before the commissioners today squander the opportunity for us to act in the best interest of investors," she said. "It merely reaffirms that broker-dealers need to meet their suitability obligations."

Staff disputed that notion later, with Dalia Blass, director of the Division of Investment Management, pointing out that advisors would carry the burden of identifying and mitigating any conflicts.

Also, “advisors cannot disclose away their fiduciary duty,” she said in response to a question from Clayton.

Commissioners were uncomfortable with the length of the rule, which came in at more than 1,000 pages, with roughly 1,800 footnotes.

Despite the length, "best interest" is not defined in the rule, Stein said.

"Despite repeated requests to define what best interest means in the rule text, it was decided there was no need to define it," she said. The rule "protects the broker-dealer, not the customer. To state it differently, does this proposal require financial professionals to put their customer’s interest first?"

While a solid supporter, Piwowar fretted that "ambiguity" could make it tough for broker-dealers to comply.

"Today’s proposal of regulatory best interest is a solid building block," he said. "We must now rely on commenters to tell us how well we’ve articulated a best interest standard."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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