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Brokers Should Be Banned From Saying They Have Ongoing Duty of Care to Clients, Experts Insist

By Rita Raagas De Ramos November 12, 2018

If the SEC will hold brokers only to best interest standards at the time a recommendation is made – instead of being required to have an ongoing duty of care – the industry watchdog should strictly monitor that brokers are not marketing themselves as providing ongoing best interest advice, according to industry experts.

The SEC’s proposed Regulation Best Interest package establishes a best interest standard of conduct for brokers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form aimed at clearly stating to clients if they are dealing with a broker or an advisor.

Among the weaknesses identified by industry and consumer groups is that the best interest standard for brokers is only applied when a recommendation is made. There’s no requirement for brokers to have an ongoing obligation or ongoing duty of care for their clients.

“Under Reg BI right now, the duty only applies to the specific recommendation even if the broker agrees to provide ongoing monitoring” of a client’s account, Karen Barr, president and CEO of the Investment Adviser Association, said at a media briefing at the Schwab Impact 2018 conference in Washington, D.C. last month. “That doesn’t make any sense to us. The duty should apply to what the broker has agreed to do for the client.”

Jeff Brown, head of legislative and regulatory affairs at Charles Schwab, agreed.

Brown said the SEC “proposed it the way they did because they looked back” at Section 9-13 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, “which said that if they apply a harmonized standard to broker-dealers, that standard does not require ongoing obligations.”

That has been the SEC’s “guidance,” according to Brown, noting he has a problem reconciling that with what brokers actually do.

“If a broker gives advice with respect to a transaction, he then becomes an advisor and is subject to the '40 Act and all the obligations thereto,” Brown said, referring to the obligations imposed on advisors in the Investment Advisers Act of 1940.

Brown doubts the SEC will revise the proposed best interest rule to include an ongoing duty of care for brokers.

“That’s something I don’t think the SEC will do. It would require them to reinterpret an exclusion that’s in the '40 Act that carves out that brokers should give advice solely incidental to their brokerage business,” Brown said. “I think that’s kind of a key element that probably won’t change.”

In that case, if the broker’s best interest requirement is not extended beyond the time a recommendation is made, the SEC should step up its monitoring of how brokers represent their duties to their clients, according to IAA’s Barr.

Jeff Brown

“We would like the SEC to look at the way brokers market themselves,” Barr said. “Even if brokers don’t agree to provide ongoing monitoring, a lot of the marketing looks like they do and we don’t think that brokers should be allowed to market themselves as providing ongoing advice and then disclaim that they are required to do so.”

Meanwhile, the SEC’s Investor Advisory Committee is insisting the securities watchdog dramatically change its proposed Regulation Best Interest to explicitly say the best interest standard is indeed the same as a fiduciary standard, as reported.

“The Commission should explicitly recognize that the best interest obligation outlined in Reg BI is a fiduciary standard and adopt an approach to its implementation that would be uniform with the Advisers Act standard in principle, but vary in its application, depending on the facts and circumstances,” the IAC says.