Investment advice rules announced Wednesday by the Securities and Exchange Commission, if finalized, will have a broad impact across the financial services industry.
The commission voted 4-1 to advance a package of three rules, kicking off a 90-day public comment period.
The SEC rules are viewed as a potential replacement for the controversial Department of Labor fiduciary rule, which was tossed out by an appeals court last month. The government is almost certainly not going to appeal that decision, said Bradford P. Campbell, an attorney at Drinker Biddle & Reath and former head of the Employee Benefits Security Administration, the department responsible for the fiduciary rule.
“The SEC no longer has to adjust itself to fit what the DOL has already done,” Campbell said. “The SEC can now lead the way and have the DOL adjust itself to the SEC’s rule.”
Although the SEC’s rules package is more than 1,000 pages, a clearer picture of the rules' impact emerged Thursday. Here is who will be affected:
• Broker-dealers: Tougher standards that require B-Ds to put clients' financial interests ahead of their own, identify and mitigate financial conflicts and stop using the terms "adviser" or "advisor" to describe themselves.
• Insurance agents: No apparent impact, according to several analysts. “We are still digesting the mountains of paper. However, our initial assessment does not indicate that insurance-only professionals making recommendations are impacted by this regulation,” said Kim O’Brien, CEO of the Americans for Annuity Protection.
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.
Stein voted no and was among several commissioners to express concerns of vague language.
“I am concerned that this rule will not only confuse retail investors, but also broker-dealers,” she said. “In particular, the lack of a definition of best interest, the use of similar terms to mean different things, the use of different terms to mean the same things, and the possibility that the SEC and FINRA interpret the same language in their suitability standards differently.”
Some language in the SEC rule leaves the door open for ambitious regulators to interpret the rules by a higher standard, said Fred Reish, a partner with Drinker Biddle.
“'Prudence and best interest' are words commonly associated with a fiduciary standard,” he explained. “I worry that there’s some language in there that if cherry-picked, could suggest something higher than suitability.”
Financial professionals should be readying extensive public comments, said Jim Lundy, a lawyer on Drinker Biddle’s SEC & Regulatory Enforcement Team.
“This is a product that is maybe a little closer to the starting line than the finish line, believe it or not,” he said. “People and firms should really embrace that invitation and think about how to put together the best comment letters they can to have their voices heard.”
Brendan McGarry, a lawyer at Kaufman Dolowich & Voluck, expects there will be guidance coming for the broker-dealer community to clarify aspects of the rules.
“It appears the SEC appears for this to be a standard somewhere above suitability,” he said. “The height of that standard remains to be seen.”
A persistent critic of regulatory attempts of financial services, Barbara Roper of the Consumer Federation of America, said there are good things in the SEC proposal.
“We think the requirement to establish, maintain and enforce policies and procedures to mitigate financial incentives is a meaningful improvement over the disclosure-only approach addressing conflicts that industry has been advocating,” said Roper, director of investment protection.
“Properly implemented, we think that has the potential to rein in some of the most troubling practices, in which firms intentionally create incentives that work against customers’ best interests.”
Roper echoed Stein’s concern that “best interest” is not defined anywhere in the rule.
“Unless the SEC is prepared to make clear that brokers are required to recommend the best available investment option, based on a careful assessment of the investor’s needs and the material facts regarding the recommended investment, they shouldn’t call this a best interest standard,” Roper said.
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].