US investment industry, gov’t embark on ‘best interest’ debate

Ever since the publication last Wednesday by Securities and Exchange Commission chairman Jay Clayton of a proposed overhaul of the way US financial advisers deliver advice to their clients, the American wealth management industry has been contemplating the prospect of yet another lengthy debate on the matter.

The SEC’s action came in the wake of an apparent collapse in a plan put forward under President Obama to introduce a so-called Fiduciary Rule – aimed at ensuring US retirement brokers give un-conflicted advice when recommending products – after a US federal appeals court last month ruled that the Department of Labor had “overreached” its powers in establishing the rule, which President Trump had opposed and vowed to dismantle when in office.  The court decision was the latest in a series of actions that have been chipping away at the Obama-era regulation, which had been actively opposed by many major Wall Street firms.

By this past weekend, US industry observers were warning of months more debates over what exactly “best interests advice” comprised, and how it should be legislated for, leaving US retirement product brokers, advisers and product providers having, in the meantime, to chart a path through an uncertain regulatory landscape.

Perhaps to avoid possible confusion with the US Labor Department’s Fiduciary Rule, The SEC is calling its version of the Fiduciary Rule “Regulation Best Interest”.

Meantime, as the New York Times pointed out, echoing other US media organisations, “not everyone is convinced the rules – if passed as proposed – would go far enough to improve consumer protections”, noting that SEC commissioner Kara Stein had voted against the SEC plan and was quoted as calling it “regulation status quo”.

At the time Trump took office in January, 2017 and set about delaying the implementation of the Fiduciary Rule, the US retirement products and advice industry was already well down the road in terms of in preparing to adopt it, which the Labor Department had estimated would cost the industry $31bn, and some said could potentially exceed that amount.

But now the future of the Labor Department’s Fiduciary Rule currently remains uncertain at best, following last month’s court decision, and is said to depend on a DOL decision to resuscitate it, which US commentators said over the weekend now seems unlikely.

The US effort to introduce a “best interests duty” or “fiduciary rule” to those sectors of its financial advice industry that don’t already have to comply with such a standard  has come as a number of countries around the world have also been moving to reduce the potential for conflicts of interest in the sale of investment and retirement products.

Australia, for example, brought in a “best interests duty” similar to the US Fiduciary Rule concept as part of its Future of Financial Advice reforms, which came into force in 2013.  In 2016 it began enforcing it.

The UK brought in its Retail Distribution Review, also in 2013, which banned commissions and otherwise introduced new rules governing the way investment advice is given, while the European Union updated its Markets in Financial Instruments Directive II in January.

Among the groups that had opposed to the US Fiduciary Rule, on grounds that it would increase their costs and ultimately, dissuade people from planning for their retirement, were the US Chamber of Commerce, the Securities Industry Financial Markets Association and other pro-industry organisations as well as many major retirement products providers.

Registered advisers also to be affected 

In announcing its planned “package of rule-makings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers, while preserving access to a variety of advice relationships and investment products”, the SEC noted that it was also planning to “clarify” its views “of the fiduciary duty that investment advisers owe to their clients”, an apparent reference to an existing fiduciary standard that SEC-regulated Registered Investment Advisors (RIAs) in the US have had to meet since 1940.

According an SEC explanation of its proposed Regulation Best Interest, it would require all broker-dealers “to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer”.

“Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations,” it adds.

With respect to its plan to clarify the SEC’s views of the fiduciary duty that investment currently advisers owe to their clients, it continues, “by highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations”.

One of the results of the ongoing controversy over the Fiduciary Rule and idea of the client’s best interests being prioritised, meanwhile, has been a growing awareness across the US by consumers of the fact that, in some instances, their best interests might not be top of their adviser’s list. This, it’s said, has resulted in more US consumers seeking out advisers who say they do adhere to a best interests rule, or who, in some cases, create their own, under guidance provided by a US advocacy group known as the Committee for the Fiduciary Standard.

To read the SEC’s public statement on its proposed Regulation Best Interest, published last Wednesday, click here.

To read and download the full, 407-page Regulation Best Interest document, click here. 

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