SEC Investor Advisory Committee Calls for Stronger Best Interest Regulations

The Securities and Exchange Commission (SEC)’s Investor Advisory Committee (IAC) submitted its views on the SEC’s proposed Regulation Best Interest, Form CRS and proposed Investment Advisers Act fiduciary guidance.

The IAC says that “all personalized investment advice to retail customers [should] be governed by a fiduciary duty, regardless of whether that advice is provided by an investment adviser or broker/dealer, to ensure that financial professionals act in their customers’ best interests and do not place their own interests ahead of their customers’ interests.”

The IAC says there are some actions that the SEC should take to ensure that this goal is put into action, starting with clarifying that the standard for broker/dealers and investment advisers should always be to act in their customers’ best interests. The IAC would also like the SEC to expand the best interest obligation to dual registrant firms with respect to rollover and account recommendations.

Further, the IAC would like the SEC to explicitly characterize the best interest standard as a fiduciary duty, and says that that SEC should continue to test the feasibility of proposed Form CRS disclosures.

With respect to the best interest standard, the IAC says its meaning “should be clarified to require broker/dealers, investment advisers and their associated persons to recommend the investments, investment strategies, accounts or services that they reasonably believe represent the best available options for the investor. There will often not be a single best option. It would start with a careful review of the client’s financial situation, along the lines of the requirement  under FINRA’s know-you-customer rule.”

With regard to rollovers and account type recommendations, these decisions are often irrevocable, IAC says. “Both types of recommendations inherently have potential conflicts of interest, making it critical that advisers and brokers put their clients’ interests ahead of their own,” IAC says.

“A majority of the IAC believes that a best interest standard is a fiduciary standard,” IAC continues. “Adopting this standard for broker/dealers could go a long way toward creating an even playing field in which brokers and advisers alike are held to a fiduciary standard, regardless of their business model,” be it ongoing monitoring of a portfolio or a one-time sale. “A majority of the committee believes that enhancing the fiduciary standard under the Advisers Act, and making the best interest obligation implied under that standard explicit, is a critical investor protection initiative for the SEC to pursue.”

With regard to the brief relationship summary, or Form CRS, that the SEC proposes that broker/dealers and advisers present to prospective clients, the IAC says that the way that the SEC is proposing to format Form CRS “is unlikely to reduce investor confusion. That concern has been reflected in many of the comment letters submitted to the commission. The disclosures should be subjected to [further] usability testing in order to determine their effectiveness, and testing should include financially unsophisticated investors.”