Did The SEC Get It Right This Time?

by: John Lohr

Summary

Fiduciary Rule?  No, the SEC did NOT publish a "fiduciary rule" proposal on April 18.

They proposed a 4-part set of rules and standards to differentiate between Brokers and Advisors.

It may not satisfy the "Pro Fiduciary" folks or the "Leave my business alone" folks, but after the 90-day comment period, I bet we have it.

The short answer is “Yes”

Here are the reasons:

1. The SEC did not make a “fiduciary” rule, despite what you may read elsewhere. With respect to the two proposals they made, they never, not once in the 500+ pages referred to, used the word, “fiduciary” That’s a good thing because ”fiduciary” has become the most overused word in our industry. It’s even used in designations by financial consultants, as in “fiduciary advisor” It means nothing, and should be abandoned. (MoneyCulture™)

2. The “best interest” proposal points principally at broker-dealers, and the distinction from investment advisors. The second, the “client relationship standards” has three parts, applying to investment advisors, broker dealers and dual registrants. They have to be read together. See below.

3. In today’s political climate, you take what you can get, and this is the “best” we can expect for investors now.

4. It will be the blueprint for the dead DOL fiduciary rule. The SEC gave the DOL something they can maybe get passed.

Here are the rules and standards in a nutshell:

Best Interest:\

The SEC states that a broker or “associated person” of a broker-dealer must, “act in the best interest of the retail customer at the time a recommendation is made without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer.”

The type of relationship must be described.

All material conflicts of interest must be disclosed.

They must exercise reasonable diligence, care, skill, and prudence. (Right out of ERISA, by the way.)

They have to have enforceable written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest.

The have to disclose that the broker-dealer is acting in a broker-dealer capacity (for BDs) with respect to the recommendation and disclose the fees and charges that apply to the retail customer’s accounts.

Client Relationship Standards

In the SEC’s infinite wisdom, “CRS” has 3 parts:

1. A CRS for investment advisors basically is what currently exists, with the additional requirement for a relationship summary.

2. A CRS for broker-dealers requires the relationship summary, restricts “broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term 'adviser' or 'advisor' in specified circumstances” and requires broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, “to disclose, in retail investor communications, the firm’s registration status with the Commission and the person’s relationship with the firm (“Regulatory Status Disclosure”).

3. A CRS for dual registrants (as both brokers and investment advisors) requires them to clarify their respective roles. They have two recommended disclosures to make. “All recommendations will be made in a broker-dealer capacity unless otherwise expressly stated at the time of the recommendation.” or “All recommendations regarding your brokerage account will be made in a broker-dealer capacity, and all recommendations regarding your advisory account will be in an advisory capacity. When we make a recommendation to you, we will expressly tell you which account we are discussing and the capacity in which we are acting.”

There you have it. Is it watered down? Sure.

Does it help investors? Some. They’ll have more disclosure papers they won’t read.

Does it level the playing field? Don’t know.

There’s a 90-day comment period before they issue a final rule. You can bet the ranch there will be a lot of comments from both sides. That means a lot of lawyers will make some more money. The final rules will probably look something like what they put out last week.

Still, the fiduciary advocacy groups now have something else to complain about, and the young kids who write for the advisory rags will have something to pontificate about.

If you’re bored and want some mental torture, put on those extra strength readers and read the full text of what came out on the 18th. I think Bruce Campbell, Fred Reisch and I are the only three who have so far.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.