Barbara Roper is director of investor protection for the Consumer Federation of America and a member of the Securities and Exchange Commission's Investor Advisory Committee.
What are the main provisions of the SEC rule for brokers, which goes into effect June 30, 2020? In theory, brokers--firms or individuals in the business of selling securities--are supposed to act in the customer's best interest and are prohibited from placing their interests ahead of the customer's interests. However, the SEC never defines "best interest." And the rules are virtually identical to how Finra [the Financial Industry Regulatory Authority] interprets its existing standard for brokers to make "suitable" recommendations.
How will brokers handle disclosures and conflicts of interest? They have huge leeway to decide how to comply. They can provide boilerplate, vague disclosures about costs, conflicts of interest and other terms of the client relationship on the front end and delay providing details until after the transaction is complete. Brokers, along with investment advisers, must provide clients with a customer relationship summary (CRS) form, covering topics such as fees and services and stating the legal obligation to act in the investor's best interest.
How are investment advisers affected? There's a new interpretation of existing regulations for investment advisers, who are paid fees to provide advice, as opposed to making sales recommendations. The SEC makes clear that advisers don't have to avoid even easily avoidable conflicts. Disclosure of a conflict is sufficient in virtually all circumstances. There has been a distinction that investment advisers have a fiduciary duty while brokers are subject to a weaker suitability standard. With this rule, both standards are weak, and neither requires your investment professional to do what's best for you. This comes at a time when we're seeing more conflicts because of the growing dominance of advisory accounts at firms that are registered as both broker-dealers and investment advisers.
Do you anticipate additional rulemaking regarding fiduciary standards? Virtually all Democrats in the House of Representatives recently voted for an amendment to prohibit the SEC from spending money to implement its regulations. Odds are long that the amendment will pass in the Senate, but if a Democrat is elected president in 2020, the new administration will likely reopen and revise the rule. The Department of Labor has indicated that it intends to create a rule covering retirement accounts this year, pegged to the SEC's regulation. There's room for the DOL's rule to be more concrete and meaningful, but I'm not holding my breath. At the state level, Massachusetts, Nevada and New Jersey are working on rules that require brokers and advisers to adhere to a strong fiduciary standard.
How can I find an adviser who will act in my best interest? Look for advisers who have structured their businesses to minimize conflicts of interest. You can find them among fee-only financial planners through the National Association of Personal Financial Advisors.
As of June 30, 2020, the CFP Board will begin enforcing a new standard that holds certified financial planners to a fiduciary duty for all the financial advice they dispense. Under the current standard, CFPs have a fiduciary duty when they engage in financial planning but not more generally when giving advice. The CFP obligation is stronger than the SEC's standard.
Anything else I can do? Ask the adviser to sign a fiduciary oath (you can download one at thefiduciarystandard.org). It documents the agreed-upon standard of conduct in case you get into a dispute, and it's a way to separate the wheat from the chaff because non-fiduciary advisers won't want to go near it. You can also look for firms with Centre for Fiduciary Excellence certification (CEFEX). These firms have agreed to adhere to fiduciary best practices and undergo audits to ensure that they are doing so.
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