Friday, August 11, 2017

ICI urges SEC adoption, DOL recognition of best-interest standard for all brokers

By Amy Leisinger, J.D.

In letters to SEC Chair Jay Clayton and the Department of Labor, the Investment Company Institute urges Commission adoption of a consistent best-interest standard of conduct for brokers providing recommendations to retail investors in retirement or non-retirement accounts. Establishing a consistent standard for brokers with regard to all non-discretionary accounts regardless of account goals would ensure that investors’ interests are put first while avoiding the potential pitfalls of the DOL’s rule, ICI states. The SEC should coordinate closely with the DOL, and the department should explicitly recognize the SEC’s best-interest standard of conduct in a streamlined exemption for service providers subject to the standard, according to ICI.

Establishing a consistent standard for brokers providing recommendations to retail investors in all non-discretionary accounts would ensure investor protection while preserving access to the products and services necessary to meet savings goals, ICI states.

Proposed best-interest standard. In the response to the SEC chair’s request for comments on the standards governing broker-dealers and investment advisers, ICI advocates that the SEC adopt a clearly defined best-interest standard of conduct for SEC-registered brokers to enhance the current “suitability” standard applicable to brokers under federal securities laws and FINRA rules. The current standard requires a broker to reasonably believe that investments and strategies recommended are suitable for a customer, but ICI contends that it should be expanded to provide explicit duties of care and loyalty, specifying that a recommendation must not put the broker’s or any individual’s interests before the client’s and that the broker exercise diligence and prudence in making a recommendation. In addition, according to ICI, the SEC should provide that a broker may receive only reasonable compensation, must provide specified disclosures about services, and is prohibited from making misleading statements regarding transactions, compensation, or conflicts of interest.

ICI also suggests that the SEC define “recommendation” consistently with FINRA’s definition of the term, as opposed to the DOL fiduciary rule’s expansive approach. FINRA takes a “facts and circumstances” approach using objective criteria in determining whether an interaction or communication involves a recommendation and has issued a great deal of guidance on the issue, ICI notes. This will clarify the status of activities currently uncertain or ambiguous under the fiduciary rulemaking, according to ICI.

A best-interest standard would avoid inconsistent application of rules to broker-dealer conduct based on whether an account is a retirement account, ICI explains. In addition, the SEC could enforce a best-interest standard directly, unlike the DOL, which would address the many concerns currently surrounding the litigation risks and uncertainty the DOL’s best-interest contract exemption has created due to the need for a private right of action for enforcement.

Related DOL exemption. In coordination with the SEC’s new standard, ICI urges the DOL to establish a prohibited-transaction exemption relating to its fiduciary rulemaking for brokers subject to the new best-interest standard of conduct and investment advisers remaining subject to the SEC’s fiduciary duty standard. An exemption would ensure that these SEC-registered entities are subject to consistent standards regardless of whether accounts involve retirement or non-retirement goals, ICI explains.

ICI also requests other changes to the DOL’s fiduciary rulemaking to avoid limitations on investor access to products and services necessary for retirement saving. If implemented in its current form, the fiduciary rulemaking will bring on billions in financial harm to retirement savers, primarily as a result of reduced product choice, costly moves to asset-based arrangements, and increasing account minimums for commission-based accounts, ICI explains. The “fiduciary” definition is too broad and threatens to turn many common interactions into fiduciary relationships, which can dramatically reduce exchanges of information currently provided at no cost to investors. The DOL should immediately postpone the implementation of its fiduciary rulemaking to January 1, 2019, to allow time for SEC and DOL cooperation to achieve coordinated standards, ICI concludes.