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Fi360 Reacts to SEC Fiduciary Rule Proposal

Posted by Fi360 on April 23, 2018

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The SEC’s mind-numbing thousand-page, three-part “fiduciary” rule package didn’t deliver everything we wanted but it was what we expected (Check out Fi360 Executive Chairman Blaine Aikin’s recent piece for InvestmentNews on this.). While disappointing that investors will continue to receive advice from both fiduciary investment advisers and non-fiduciary brokers, the bar for both has been raised – marginally for advisers, and according to the SEC, materially for brokers. Of course we won’t know how high the bar has been raised until a final rule is adopted.

It is a back to the future scenario. Assuming the DOL rule stays dead for lack of an appeal back to the Fifth Circuit Court of Appeals, fiduciary advisors under ERISA will revert to the higher “sole interest” standard for retirement advisors that existed up until June of last year. Brokers that would have been fiduciaries under the DOL rule will fall down to a new, non-fiduciary “Regulation Best Interest” standard that brings with it quasi-fiduciary versions of the duties of loyalty and care. Interestingly, new model suitability rules coming out from insurance regulators more closely track the DOL’s Impartial Conduct Standards and with more robust fiduciary characteristics than are found in this first stage of the SEC’s rulemaking.

The shortest section of the newly proposed SEC rule (38 pages) notes that it’s largely status quo when it comes to the fiduciary status of registered investment advisors (RIAs). They will have additional disclosure requirements captured in a new Part 3 added to the ADV. This short (4-page maximum) document will also be required of brokers and dually-registered advisors providing consistency and the ability for investors to see specific standard of conduct differences across business models. The proposal also solicits comments on the merits of imposing a new Continuing Education requirement for advisors, similar to what is required of brokers, along with possible net capital and bonding requirements. Ironically, most state-licensed advisors have had the latter requirements for decades.

Brokers will have a new, higher “Care Duty” and conflict avoidance or management obligations, along with prohibitions against using the title “advisor” or “adviser” unless they properly register with the SEC. Interestingly, the proposal notes the potential competitive advantage of firms that are accustomed to working as fiduciary advisors and already prepared to comply with the new rules.

The devil is in the details and in bringing a final rule to pass that meets fiduciary muster. The initial rulemaking may be only a modest step forward in terms of investor protection, but it is not a leap backward as feared by some fiduciary advocates. For Fi360 stakeholders, timing of the SEC’s proposal is perfect. Next week, top practitioners, academics, regulators, and thought leaders will gather for the nation’s foremost fiduciary event – the Fi360 Annual Conference, which convenes in San Diego. We will follow up soon with the latest, most insightful coverage of the SEC’s proposed rule.

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