ACLI, IAA Comment on SEC Standards of Conduct Proposals

They say that additional interpretation of standards of conduct for investment advisers is unnecessary and that imposing broker/dealer standards on life insurers and investment advisers is inappropriate.

The American Council of Life Insurers (ACLI) and the Investment Adviser Association (IAA) both commented on the Securities and Exchange Commission’s (SEC)’s standard of conduct proposals, for the most part saying that additional interpretation of standards of conduct for investment advisers is unnecessary and that imposing broker/dealer standards on life insurers and investment advisers is inappropriate.

As for Form CRS, which would create a requirement for a uniform relationship disclosure document to be used by broker/dealers and investment advisers, ACLI says that it is not conducive to life insurance products.

“Life Insurers provide significant written disclosures at the point of sale to satisfy multiple regulators’ requirements and to help customers understand the nature of their various products and relationships,” ACLI says in its letter to the SEC. “These disclosures include many product related materials (insurance sales illustrations, policy contracts, required “buyers’ guides,” prospectuses), marketing materials describing the firm’s offerings, documents that provide the terms for a brokerage or advisory relationship (brokerage account agreements, advisory account agreements, Form ADV, investment policy statements), and other required disclosures.” In addition, “life insurers fulfill a considerable amount of post-sale disclosure depending on the nature of products and services provided, such as in-force insurance ledgers, transaction confirmations, periodic performance reporting for investment accounts, and updated Form ADV brochures.”

ACLI goes on to say that “the proposed Form CRS is based on a full-service broker/dealer model and does not provide for workable disclosure of information relevant to customers of insurance-affiliated broker/dealers. Firms should have the flexibility in the Form CRS to accurately describe their business model and what their clients can expect from the relationship. This would make the document more user friendly and hopefully make it more likely that a customer would read the document. We believe that the intent of the Commission in creating the proposed form would best be met by allowing for greater flexibility in the required disclosures.”

As for Regulation Best Interest (Reg. BI), regarding appropriate conduct standards for broker/dealers, ACLI is in favor of it, saying in a letter to the SEC, “Reg. BI is vastly superior to the prescriptive, and now vacated, DOL Fiduciary Rule and its BIC exemption. Life insurers strongly support protections serving the best interests of customers, which can be meaningfully safeguarded with disclosure about services and material conflicts of interest. This approach provides an effective means to shield consumers and facilitate informed purchase decisions.”

However, ACLI says, “it is critical that proposed Reg. BI equitably includes life insurers’ products, functions, services and regulatory framework within the scope of the SEC’s focus in developing a final regulation. The disclosure standards and objectives should be consistent and parallel in Form CRS and Reg. BI to avoid confusion and to promote clear understanding. A more flexible approach to required disclosure is preferable and would serve consumers better.”

As far as the SEC’s proposed interpretation regarding standards of conduct for investment advisers, ACLI asks the SEC not to “propose additional, unnecessary requirements in the investment adviser space. Investment advisers are adequately regulated, and ACLI recommends that the SEC not use its current interpretation as a foundation to promulgate additional regulation in an area where it is not needed. ACLI has concerns that any proposed enhanced regulation for investment advisers would create duplicative and unnecessary regulation.  Life insurers with associated investment advisers and broker/dealers are subject to multiple layers of regulation from state insurance commissioners, state securities regulators, the SEC, and FINRA. In lieu of any proposed regulation, the SEC should continue to provide interpretative guidance and rely upon the voluminous existing guidance and case law regarding the duties of investment advisers, rather than attempting to codify this body of existing law.”

For its part, IAA also says that regulations should be more flexible and that the SEC should not impose “unnecessary and ill-fitting” broker/dealer regulation on investment advisers.

“We are concerned that ‘harmonization’ of investment adviser and broker-dealer regulation would result in an overly prescriptive, check-the-box regulatory regime that does not fit advisers’ businesses and is not consistent with the flexible principles-based fiduciary duty for advisers,” IAA tells the SEC in a letter. “Accordingly, we recommend the Commission refrain from any rulemaking in these areas.”

IAA goes on to say that “Investment advisers’ business models and activities differ significantly from those of broker/dealers. Given those differences, financial responsibility rules are inappropriate and unnecessary for advisers. A requirement for advisers to provide account statements would be duplicative. Investment adviser clients currently receive account statements from custodians.  Further, the custodial account statement or an invoice from the adviser specifies the actual advisory fees clients pay. “

IAA adds: “Federal licensing and continuing education requirements for investment adviser personnel are unnecessary.  Advisory personnel who engage with retail clients are already subject to state licensing and qualification requirements. The Commission has not explained why a second layer of licensing and qualification is warranted.  Further, advisory personnel are subject to a range of compliance requirements and already receive training on the laws, regulations, and fiduciary obligations applicable to advisers.  Finally, advisers already are required to provide clients with a description of the qualification, education, business background, disciplinary history, and additional compensation (including sales awards) for personnel providing advice for each client. This information is required to be affirmatively provided to each client for whom the advisers’ personnel are giving or formulating advice, and is far more relevant to a client assessing the qualification of such personnel than passing an exam. There is no such counterpart for broker/dealers.”