During a recent speech, Securities and Exchange Commission (SEC) Char Jay Clayton said the market regulator is aiming to finish work on its Regulation Best Interest proposal during 2019.
For retirement industry fiduciary advisers, the SEC’s introduction in April of a proposed Regulation Best Interest was one of the seminal moments of 2018. Coming fairly soon after the defeat of the Department of Labor’s fiduciary rulemaking process in appellate court, the SEC’s new rulemaking effort quickly took center stage in many advisers’ minds when it comes to important regulatory changes on the horizon.
“These proposals, individually and collectively, are designed to enhance retail investor protection and decisionmaking by elevating the broker/dealer standard of conduct and reaffirming—and in some cases clarifying—the fiduciary standard for investment advisers, as well as requiring more candid and plain language disclosures,” Clayton said. “Using plain language, we are bringing the regulation of conduct and communications in line with the reasonable expectations of our Main Street investors.”
Clayton said the proposed rules seek to accomplish three things. First is requiring broker/dealers to act in the best interest of their retail customers by expressly requiring that the investment professional not place her or his interests ahead of the interests of the client; next is reaffirming, and in some cases clarifying, the fiduciary duty owed by investment advisers to their clients; and last is requiring both broker/dealers and investment advisers to state clearly key facts about their relationship, including their financial incentives.
“Importantly, the proposed rules are designed to preserve retail investor access—in terms of choice and cost—to a variety of types of investment services and investment products, while giving investors the tools to select the type of relationship that is appropriate for their needs and in line with their expectations,” Clayton said.
In the recent speech, Clayton referred to SEC’s ongoing work on this topic as “very important and long overdue.” He said comment letters written to SEC about this and other proposals show many individual investors do not have a firm grasp of the important differences between broker/dealers and investment advisers.
“They don’t understand the differences in the variety of services that they offer, how investors pay for those services, and the regulatory frameworks that govern their relationship,” Clayton said. “This is a complex set of issues, no doubt, but we must also recognize that access to investment advice is increasingly important to our society. And we must recognize that while the current framework needs improvement, it is extensive and in many areas functions well for our Main Street investors, particularly as compared to other jurisdictions.”
Clayton emphasized that, in terms of SEC’s 2019 agenda, completing the rules relating to the standards of conduct for financial professionals is “a key priority.”
“Since the April 2018 proposal, we have engaged with Main Street investors across the United States to discuss their experiences. SEC staff organized a series of seven roundtables around the country, providing Main Street investors an opportunity to speak directly with me, my fellow Commissioners and senior SEC staff—all in an effort to improve the proposed rules,” Clayton said. “It is clear, based on these discussions, that we have the right perspective, namely, that the core obligations of investment professionals—and mandatory plain language disclosures—should match reasonable investor expectations.”
Clayton adds that SEC staff received more than 6,000 comment letters on this subject, and is currently engaging with the comments to develop final recommendations.