Standards of conduct similar to now-quashed DOL fiduciary
rule.
The SEC is making a concerted effort to tackle one of its
most complicated issues — a standards of conduct package covering investment
advisory professionals.
"This is one of the most complex rule-makings that
the SEC has had to address," said Karen Barr, president and CEO of the
Investment Adviser Association in Washington. "It is multifaceted, there
are a wide range of business models and types of investment advice, there's a
wide range of marketing practices and there are a wide range of interests. So I
think this is complicated both from a technical perspective and
politically."
The Department of Labor's fiduciary rule was similar in
scope, but the 5th U.S. Circuit Court of Appeals vacated it in March, saying it
represented regulatory overreach. While the SEC does not focus exclusively on
retirement plans, industry experts said the proposals nevertheless could affect
them.
The proposals, approved by the commission in April and
put out for a public comment period that closed Aug. 7, feature three legs:
A best-interest standard that compels brokers to put
clients' financial interests ahead of their own and requires them to mitigate
financial conflicts.
The client relationship summary, or Form CRS, which
necessitates that firms disclose to retail investors the nature and scope of
their services, the types of fees customers would incur, the conflicts of
interest faced by the firm and the firm's disciplinary history.
A standard of conduct for investment advisers that states
advisers have a duty to act and provide advice that is in the best interest of
the client.
In testimony before the House Financial Services
Committee last month, Dalia Blass, director of the SEC's division of investment
management, estimated there were more than 6,000 comments on the rule-making
package.
In its comment letter to the SEC, the American Retirement
Association applauded the commission's decision that recommendations to
rollover or transfer assets from retirement plans should be covered under the
best-interest standard.
But since many participants do not roll over their
retirement plan accounts until they reach retirement age, "it is paramount
that financial professionals be held to a high standard of care when providing
investment advice to (fiduciaries) responsible for retirement plan
assets," the ARA wrote. It asked the SEC to clarify the standard to avoid
any "gap" in regulatory coverage.
The National Association of Government Defined
Contribution Administrators, Lexington, Ky., sought confirmation in its comment
letter on whether participants in defined contribution plans are covered under
the best-interest standard. While the proposal states that "the definition
of 'retail customer'... would cover, for example, participants in ERISA-covered
plans and IRAs," the SEC did not address whether DC plan participants, like
public employees who are not covered by the Employee Retirement Income Security
Act of 1974, would be considered retail customers, NAGDCA stated.
Several suggestions
The IAA in its comment letter outlined several
suggestions it said would enhance the rules. Ms. Barr said the best-interest
standard would be better suited if its scope was applied to all advice that
broker-dealers give their clients. The proposal would require broker-dealers to
give advice in the clients' best interest only when the broker is making a specific
investment recommendation. The standard would not extend to the entire
broker-client relationship, like it does for investment advisers.
Overall, IAA is pleased the SEC is moving forward on the
issue, Ms. Barr said.
The same is true for the Securities Industry and
Financial Markets Association. Kevin Carroll, SIFMA managing director and
associate general counsel, said he's unsure why the proposal is controversial.
"We just see this as raising the conduct standards for broker-dealers,
which enhances investor protection."
Mr. Carroll said the best-interest standard recognizes
the "inherit differences between broker-dealers and advisers and creates a
standard that's specific to brokers and that's why I think this approach is
going to work."
Jason Berkowitz, vice president and counsel for
regulatory affairs for the Insured Retirement Institute in Washington, said the
proposals represent a sensible approach. But one item the institute would like
to see altered is the Form CRS proposal. According to Mr. Berkowitz, the
proposal didn't take into account how variable annuities are "often sold
through broker-dealers but are not in brokerage accounts. The contracts are
actually held by the insurance companies."
"We're trying to help them fine-tune what we think is
a very good proposal," he added.
Looking ahead
SEC Chairman Jay Clayton has devoted time and resources
to the rule-making package this year, including hosting six roundtable
discussions in June and July. In testimony before the House Financial Oversight
Committee in June, Mr. Clayton said, "There are conflicts in an investment
adviser relationship and there are conflicts in a broker-dealer relationship.
Disclosing them, mitigating them making sure that everybody understands what
the motivations are, that's what we're going to do in this space … or I should
say that's what I want to do in this space."
David G. Tittsworth, a lawyer at Ropes & Gray and
former president and CEO of the IAA, said he's not expecting any resolution on
the matter this year.
"Could he possibly get a vote of the five
commissioners before the end of this year? Yeah, I think it's possible,"
Mr. Tittsworth said. "That would be really aggressive. There's so many
controversial issues wrapped up in the three (SEC proposals)."
It's more likely that something gets done in the first or
second quarter next year, he said. But politics will come into play regardless
of the timing. "I don't see a way that he could get a bipartisan vote,
that he could get anything other than 3-2," Mr. Tittsworth said of Mr.
Clayton. "I'm sure he would like to avoid a 3-2 vote but on that
particular set of proposals I just don't see it ever happening. Whoever the
five commissioners are I think that it will be 3-2."
With the Senate confirmation of Elad Roisman last month,
the SEC once again has a full slate of commissioners, with Republicans holding
a 3-2 majority.
One Republican commissioner, Hester Peirce, has
criticized the Form CRS proposal. In a speech over the summer now posted on the
SEC's website, she said: "Form CRS is chock-full of legalese and technical
terms. Is this approach, which seeks to familiarize investors with terms they
might encounter in their interactions with financial firms, appropriate?"
There will likely be changes made to the Form
CRS proposal, Mr. Tittsworth said. "You've got to have (Ms. Peirce's) vote
or there's no way you're going anywhere."
Click here for the original article.