Monthly Archives: April 2018

Fiduciary and Best Interest Rules

Between the existing DOL fiduciary rule and the new SEC best interest proposals, who is impacted by which regulations, and how?

The DOL fiduciary rule was originally proposed in 2010. It finally came into effect in June 2017 after some revisions, but has been officially not enforced by the DOL. In March, the Fifth Circuit Court overturned the rule. This ruling is being appealed not by the DOL, but by a group of state Attorneys General and by the AARP. The impact of this rule was only to qualified plans and retirement accounts, although in a big change for many money managers, it applied to everyone who selected or recommended investments in those plans or accounts.

Consumers are in favor of the DOL rule. In 2013, AARP surveyed more than 1,400 people.   93% favored requiring retirement advice to be in their best interest, and fewer than four in 10 indicated that they would trust advice from an advisor who is not required by law to provide that advice in the best interest of the investor.1

In the wake of the fiduciary rule debate, several states have passed laws or regulations that address the issue. New Jersey, New York, Connecticut, and Nevada are all in the process of implementing rules that address investment adviser conflicts of interest and fiduciary duty. These rules vary by state, with Nevada being the most stringent, requiring the fiduciary standard for all those giving investment advice, in all types of accounts.

In April, the SEC weighed in with their own new set of standards for investment advice. Coming in at over 1000 pages in total, the SEC sets out 3 proposed rules: Regulation Best Interest2, Relationship Summary3, and Restrictions on the Use of Certain Names or Titles3. Additionally, there is a regulation interpreting the fiduciary duty of Registered Investment Advisers4.

Although these new rules seem to be intended to add consumer protections, there are concerns that not only do the rules not go far enough, but that they may even dilute the existing RIA fiduciary duty. A major criticism of the new rule is that “best interest” remains undefined, which led SEC Commissioner Kara Stein to nickname the rule “Regulation Status Quo.” Ms. Stein, in her comments published on the SEC website5, states, “this proposal allows a broker-dealer to meet its “best interest” obligation by doing three things: providing some “reasonable” disclosure about its relationship with the customer, fulfilling what are essentially the existing standards for broker-dealer conduct (i.e., suitability), and having reasonably designed policies and procedures to eliminate, or mitigate and disclose the broker-dealer’s competing interests. By doing these three things, the proposed regulation protects the broker-dealer from liability or penalty, or what lawyers call a “safe harbor.” It protects the broker-dealer, not the customer.”

Commissioner Hester Pierce voted in favor of the new rules, but also agreed that this is not adding a fiduciary standard for broker-dealers or other agents or sales reps, stating, “It would be better to say we’re proposing a suitability-plus standard.”6

To an RIA, the disclosure mock-up in the new rules is particularly objectionable, characterizing the RIA as the more expensive option and emphasizing the relationship with a broker-dealer as “best interest” and “fair,” while not defining the fiduciary relationship at all.7 The comparable broker-dealer document contains similar language, while distinguishing the fiduciary relationship from the “best interest” relationship as being different merely in scope.8

While minimizing the difference between business models in the new required disclosures, the SEC seems to try to distinguish between them in their restrictions on the use of certain names and titles. The new rules restrict the use of the words “adviser” and “advisor,” not allowing broker-dealers or their employees to use those titles. RIAs, and, oddly, representatives of banks, insurance companies, and CTAs are still specifically allowed to use these titles. It has been suggested that this new rule might mainly result in more broker-dealers cross-registering as RIAs.

If the SEC wants to continue to allow the broker-dealers and others to provide investment recommendations without fiduciary duty, it’s important that consumers understand that these are, in fact, very different business models, with very different levels of care and loyalty to the consumer. There is certainly a need for the broker-dealer for those who wish to direct their investments, but the least informed consumer, most in need of fiduciary care, is the one who will be least helped by this new best interest rule and disclosure documents, and most likely to be misled by a person titled “adviser” or “advisor” who is in fact acting mainly as a sales representative.











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