SEC Proposes Revised Conflict of Interest Standards for Brokers and Advisers

It will take time for the fully detailed picture to emerge, but the SEC voted late Wednesday to propose new conflict of interest standards for how broker/dealers and financial advisers label themselves and sell products under various fee structures to retail clients.

The Commissioners of the U.S. Securities and Exchange Commission (SEC) voted by a four-to-one majority to propose a multi-pronged set of new impartial conduct standards and disclosure requirements that will apply to both financial advisers and broker/dealers serving “retail clients,” which in the eyes of the SEC includes retirement plan participants.

A note of caution—the actual text of the proposed rulemaking is hundreds of pages long and was still just emerging at the time of the publication of this story. However, as it was explained during an SEC meeting, the new rulemaking will center on several basic items.

First, the proposal will “mandate clearer disclosures specifically addressing how broker/dealers and investment advisers identify themselves, and what terms they use to do so.” According to SEC staff, the proposal will require both advisers (who are fiduciaries and will remain fiduciaries under the current and proposed SEC rules) and broker/dealers (who are not necessarily fiduciaries) to provide all retail investors with a standard disclosure document less than four pages in length, highlighting the scope of services offered, legal and regulatory standards that apply, all fees the investor will pay, and disclosing conflicts of interest. This document is already being referred to as the CRS disclosure, short for “customer relationship summary.”

Second, the “Regulation: Best Interest” section of the proposal will “raise the standard for broker/dealers to make it clear that they have to keep customer interests first when serving retail clients.” And lastly, SEC staff explained, the proposal will recast the fiduciary standard under the Advisers Act, “in order to reaffirm and clarify the SEC’s views on the standards of conduct applicable to investment advisers, who are fiduciaries.”

This explanation was proffered by SEC chair Jay Clayton and his staff. Commissioner Kara Stein was harshly critical of the proposal being voted on. She insisted that the three-pronged proposal would do very little to change the status quo of retail investor confusion on this important topic. The other commissioners also voiced various concerns and projected that the final rule will likely look different than this first proposal. 

For their part, the SEC staffers were emphatic that, under the new proposal, advisers and B/Ds alike will not be able to place their own financial incentives ahead of client interests. Among other avenues, the proposal will seek to require non-fiduciary brokers to more directly consider the cumulative costs associated with their commission-based sales to retail clients—and to prevent and address any non-best interest churning or other behaviors that result in sub-optimal outcomes for retail clients.

While they did not directly mention the failed Department of Labor (DOL) fiduciary rulemaking effort, which would have gone even further to tamp down on investment industry conflicts of interest than the emerging SEC proposal, they did speak about the importance of alleviating investor confusion about the differences between “advisers” and “brokers,” and about who is a fiduciary in what circumstances.

According to the SEC staff, the new proposal will not favor commission or fee-based advisory or brokerage models, but will seek to improve the disclosure of what fee model is being used—and whether the relationship is “advisory or brokerage.”

Stakeholders are encouraged to review the proposals and submit comments, via