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Fiduciary Advocates Slam SEC’s Investment Advice Reform

May 8, 2018

SEC chief Jay Clayton said last week the regulator’s recently proposed best interest rule would harmonize the currently divergent regulations applied to broker-dealers and investment advisors, but investor advocates argue that’s far from the case, InvestmentNews writes.

"Broker-dealers will be, and investment advisers already are, required to act in the investor’s best interests. I believe the outcomes in both cases should be the same,” Clayton said in a May 2 speech in Philadelphia, according to the publication.

Currently, brokers are only obligated to follow the suitability standard, which requires them to sell products that are suitable to their clients’ objectives while allowing brokers to recommend ones that pay them a better commission, InvestmentNews writes. And the recent proposal keeps separate regimes for RIAs and brokers, according to the publication.

Investor advocates say the SEC’s new regulation would not achieve harmonization, InvestmentNews writes. Kurt Schacht, managing director in New York for the CFA Institute, says the new proposal appears to let broker-dealers sell higher-priced versions of products as long as they’re suitable for the client and the broker-dealer makes a disclosure about the incentives, according to the publication.

"That seems more like caveat emptor than fiduciary harmony to us,” Schacht tells InvestmentNews.

Knut Rostad, president of the Institute for the Fiduciary Standard, meanwhile, says the “masters” served by RIAs and broker-dealers remain different: the client for the former and the firm for the latter, according to the publication.

"These differences remain. To suggest otherwise is to miss a big point,” Rostad tells InvestmentNews. “RIAs should think, ’Houston, we have a problem.’”

Jay Clayton

Kate McBride, the founder of the fiduciary consulting and certification assessment firm FiduciaryPath and a member of the Committee for the Fiduciary Standard, tells the publication that the Department of Labor’s recently vacated fiduciary rule represented a “true fiduciary standard.”

The DOL’s rule purports to require retirement account advisors to put clients’ interests first but went into only partial effect last summer, before an appeals court vacated it in March.

"It’s commendable that the SEC is trying to raise the standard for brokers, but it’s not a fiduciary standard," McBride tells InvestmentNews. "It’s not there yet. It is not the same standard as the DOL proposed, even though they’re using the same words."

Meanwhile, investor response to the SEC’s proposal has been overwhelmingly negative as of the end of last week, as reported.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.