SEC To Vote On Best Interest Rule

The Securities and Exchange Commission is voting tomorrow on a three-part rulemaking package containing regulation best interest.

While it is unknown what the final rule being voted on will look like, the proposed rules attempt to fill in holes left by the vacated Department of Labor fiduciary rule and issue a firm federal ruling in the wake of states enacting their own standards, creating a patchwork of rules across the country.

In addition to Regulation Best Interest, the vote will include three other items: Form CRS, Standard of Conduct for Investment Advisers and an item not included in the rulemaking package called Interpretation of “Solely Incidental.”

Regulation Best Interest

Arguably the most contentious item on the docket for Wednesday is Reg BI. The rule would establish a standard of conduct for broker-dealers when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.

Much of the criticism about Reg BI has been over whether or not it is a strong enough standard for investors. Barbara Roper, director of investor protection at the Consumer Federation of America, called the rule a repeat of FINRA’s suitability standard during a congressional subcommittee hearing in March.

“A rule that appeared at first glance to offer promise, is revealed to do little more than simply codify the existing requirements under FINRA suitability rules,” she said.

Others applauded the commission for finding a middle ground between the DOL fiduciary rule and the current suitability standard.

Rep. Ann Wagner, R-Mo., who was a leading opponent of the DOL rule in the Republican-controlled Congress and said she would like to see a rule that preserves distribution.

“I applaud [SEC] Chairman [Jay] Clayton and look forward to a finalized SEC rule very soon that will create a best interest standard for broker/dealers that benefit the most vulnerable consumers and restores their choice and access to financial products at an affordable cost,” Wagner said.

Form CRS

Also on the docket is Form CRS. The SEC is considering whether to adopt new and amended rules and forms to require registered investment advisors and registered broker-dealers to provide a brief relationship summary to retail investors.

The proposed form has faced scrutiny over its paper trail. Advisors and industry professionals argue that Form CRS is unnecessary and redundant, saying that much of the information it would contain (fee tables, disclosures and conflicts of interest) can be found in other documents provided to investors.

Standard Of Conduct For Investment Advisers

SEC Chairman Clayton has said that preserving choice while raising the bar has been the goal of Reg BI, acknowledging that no one business model works for all investors. By establishing Regulation Best Interest for broker-dealers and a maintaining a separate standard of conduct for investment advisors, Clayton and the Commission hope to preserve competition and choice through maintaining difference business models.

While testifying before Congress in May, Clayton said, “regardless of whether the retail customer chooses a broker-dealer or an investment adviser, the retail customer will receive recommendations (from a broker-dealer) or advice (from an investment advisor) that are in the best interest of the retail customer, and that do not place the financial professional's interests ahead of the interests of the retail customer."

Item 4 – Solely Incidental

In an unexpected move, the SEC will consider whether or not to publish a Commission interpretation on the “solely incidental” prong of section 202(a)(11)(C) of the Investment Advisers Act of 1940.

The clause in question is an exemption stating that broker-dealers are not obligated to act in the same fiduciary duty as RIAs, assuming that any investment advice they give solely relates to a sale of securities that are performing and they are not receiving special compensation for the advice being given.

It’s not clear what changes the SEC might be looking to make to the solely incidental clause. They could reaffirm the position that brokers can’t use the exemption to avoid having any fiduciary duty or issue an entirely new interpretation of the exemption.

What A Final Rule Might Look Like

In 2018, The SEC gave a 90-day comment period for financial professionals, investors and special interest groups to offer their thoughts on Regulation Best Interest. It is unknown if and what changes from the comment period will be implemented on a final ruling.

As late as March, the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets agreed that Reg BI needed tweaking.

Representative Bill Huizenga, R-Mich., said then that the proposal was not perfect, but should not be overhauled.

“Today’s hearing asks the question is the SEC’s Reg BI ‘putting investors first?’” Huizenga said. “The answer is a definite and resounding yes, with some refinement that needs to happen.”

The vote will be held in an open meeting at 10 a.m. ET tomorrow. A live webcast of the proceedings can be viewed here.

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.