Faced with differing standards for investment advisers and brokers, the SEC is preparing a consistent standard for both. SEC chair Walter Clayton has said that clarity and consistency are key to regulating areas supervised by more than one agency. This appears to be a key priority for the SEC chairman.

Clayton’s work on the fiduciary standard is expected to respond to the financial industry’s complaints about the “best interest” rule from the Department of Labor (DOL) for investment advisers who specialize in retirement accounts that partially went into effect earlier this year. While the DOL rule applies only to retirement savings subject to the ERISA Act of 1974, the SEC has the power to regulate all financial service professionals.

Registered Investment advisers are required to offer investment advice that reflects the best interest of their clients according to the Investment Advisers Act of 1940, but brokers follow a more lenient “suitability” standard that only requires them to meet their clients’ broad investment goals and appetite for risk. The looser restrictions let brokers guide clients into financial products with high commissions and sometimes poor returns. The SEC has been studying whether a uniform fiduciary standard should be applied to all investment professionals.

The DOL issued its rule (for investment advisers) to address a growing problem that has left too many retirees and a growing number of people nearing retirement without enough money saved to cover their basic costs once they have stopped working. Investor advocates say the DOL rule will prevent retirement advisers from shortchanging customers, but the DOL recently delayed key provisions of the rule until July 2019 after heavy lobbying by financial companies that said costs will rise and choices will shrink for investors who want to save for retirement.

In the meantime, the financial industry has been pressing the SEC to adopt a more permissive rule.

“In view of the impact of the department’s investment-advice fiduciary rule on the marketplace, the FSR believes the commission should consider whether, and to what extent, the DOL rule exacerbates retail customer confusion, reduces the product offerings available to retail customers, and increases the costs borne by retail customers”, Richard Foster, senior vice president for the financial industry lobbying group, the Financial Services Round-table (FSR), wrote in an October 17 comment letter in response to a request from Clayton for public input about the fiduciary requirement.

Foster said FSR members have noted several trends that hurt customers, including less guidance and support to IRA owners and small plans, increases in minimum account size, limits on investment vehicles, a shift to fee-based accounts and away from trading commissions, and moving clients with smaller accounts to self-service or robo-advice.

Investor advocates do not want the SEC to be influenced by the brokerage industry and urged the agency to establish a fiduciary standard that is as strong as the DOL’s best interest rule on retirement advisers.

“Brokerage industry lobbyists have made no secret of their goal to win a watered down, disclosure-based standard from the SEC and then to use that standard to satisfy compliance with DOL’s more rigorous rule”, Barbara Roper, director of Investor Protection with the Consumer Federation of America, wrote on September 14. “Early evidence clearly demonstrates that the DOL rule is both workable and working as intended to deliver tangible benefits to retirement savers.”

The problem, in Roper’s view, is that investors are being misled into relying on biased sales recommendations as if they were objective. She said the SEC should eliminate misleading practices that allow brokers to portray themselves as advisers. Alternatively, the SEC could adopt a fiduciary standard for all recommendations so that investors are protected regardless of the type of financial professional they go to for investment advice.

“There is more than one way to shape a best interest standard”, Tom Quaadman, an executive vice president with the chamber, wrote on December 13. “It should also be recognized that the ‘best interest’ of an investor can depend on the particular circumstances of that investor, including overall investment objectives and risk tolerance. A one-size-fits-all standard may not truly reflect the diverse objectives and interests of millions of retail investors.”

The U.S. Chamber of Commerce said investment advisers and brokers should act in the best interests of retail investors they advise, but added a rule’s details are important.

Source: “Accounting Highlights”, Dec. 29, 2017 (Thomson Reuters)