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Background
In April of 2018, the Securities and Exchange Commission (SEC) proposed Regulation Best Interest in an effort to raise the standard of care owed to consumers from the current “suitability” standard to a true “best interest” standard. According to the SEC’s Open Meeting Fact Sheet, the “rulemaking package seeks to enhance investor protections while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.”
During the entire process that the Department of Labor (DOL) sought to redefine who is a fiduciary when working with retirement accounts, including Individual Retirement Accounts (IRA), NAIFA’s position was that the DOL should wait until the SEC completed its study, as the SEC is the regulatory agency with full jurisdiction and with expertise on investment accounts, securities licensed individuals and their firms, and marketplace misconduct.
The SEC was mandated in Section 913 of Dodd-Frank to undertake a study, which it completed and published in January 2011. In June of 2017, it requested comment letters regarding the issues surrounding consumer protections and standards of conduct for investment professionals.
Issue
Regulation Best Interest (Reg BI) closes the gap between suitability and best interest by requiring that broker-dealers (and their registered representatives) have a duty to act in the best interest of the client without putting their own interests above those of the client.
Reg BI identifies three specific obligations, including a disclosure obligation, a care obligation and a conflict of interest obligation. It includes simplified disclosures in readily understood format, not more than four pages, that tell consumers the nature of the relationship, including duties and obligations of the investment professional, the fee structure and any material conflicts of interest. The rulemaking package includes an interpretation to clarify the obligations of Investment Advisors and their fiduciary duty to their clients.
The rulemaking package also includes significant changes to who can use the term “advisor” or “adviser” based on the SEC’s belief that there is confusion in the market about the difference between broker-dealers and investment advisors.
NAIFA Position
NAIFA supports a best interest standard of care as long as the requirements do not drive consumers to a certain business model (e.g., fee-based versus commission-based); does not limit consumer choice and access to personalized, professional education, recommendations and advice; and that does not create a new enforcement mechanism that would create increased liabilities and higher consumer costs.
We believe that Reg BI sufficiently meets these NAIFA prerequisites, with the exception of the restrictions to the use of the term “advisor.” One of the SEC’s stated reasons for believing this change is necessary is that “investment advisor,” “financial advisor” or “advisor” are so similar as to be misleading to consumers.
NAIFA strongly believes that consumers do not understand the legal distinctions under SEC rules for those Registered Investment Advisors and their Investment Advisor Representatives. Further, the term “financial advisor” is generic in nature and generally understood to be professionals who offer advice and education on a variety of financial issues, certainly not limited to investment advice under the SEC.
Additionally, NAIFA strongly believes that this restriction will create more, not less, consumer confusion and that by raising the standard of care, as Reg BI does, negates the need for any further restrictions. Indeed, if all investment advice must be put in the clients’ best interests, using reasonable diligence, care, skill and prudence to ascertain that the product is in the best interest of the client, and that policies and procedures are in place to disclose, mitigate and eliminate conflicts of interest, then restricting the term advisor creates an unfair bias against broker-dealers and their registered representatives.
Additionally, NAIFA strongly believes that this restriction will create more, not less, consumer confusion and that by raising the standard of care, as Reg BI does, negates the need for any further restrictions. Indeed, if all investment advice must be put in the clients’ best interests, using reasonable diligence, care, skill and prudence to ascertain that the product is in the best interest of the client, and that policies and procedures are in place to disclose, mitigate and eliminate conflicts of interest, then restricting the term advisor creates an unfair bias against broker-dealers and their registered representatives.
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