By Amy Leisinger, J.D.
By a 16-3 vote, the SEC’s Investor Advisory Committee approved a recommendation to the Commission to strengthen and clarify certain aspects of proposed Regulation Best Interest. According to the IAC, the standard for broker-dealers and investment advisers should be clarified with regard to the obligation to act in customers’ best interests, and the best interest standard should be characterized explicitly as a fiduciary duty under which specific obligations vary with regard to different business models. In addition, the committee recommended that the best interest obligation be expanded to cover initial rollover and account-type recommendations to customers and that the Commission conduct usability testing of the proposed Form CRS disclosures to ensure that they enable investors to make informed choices.
Recommendations. According to the IAC, the proposal should be modified to clarify what is meant by the requirement that brokers and investment advisers act in their customers’ best interests by specifically requiring them to recommend the investments, strategies, accounts, or services that they reasonably believe represent the most favorable options for each investor. This determination should involve a careful review of the investor’s needs and goals as well as reasonably available products and services and associated costs, the committee states. More than one available option may satisfy this standard, the recommendation notes, and compliance should be measured based on whether the broker or adviser had a reasonable basis for the recommendation when it was made. As the Commission moves forward with its rulemaking, the IAC believes it should provide additional guidance to help brokers and advisers understand how to best meet their obligations.
In addition, the IAC notes that some of the most crucial investor decisions occur at the outset of a relationship with a broker or and adviser, well before recommendations are made regarding specific transactions. Decisions about rollovers and account types and the scope of services to be provided set up the parameters of the relationship and could have an even more substantial impact than subsequent investment recommendations, the committee explains. As such, the committee recommends that these recommendations also should be subject to a best interest standard.
The Commission should also explicitly clarify that the best interest standard of Regulation BI is a principle-based fiduciary obligation and adopt an approach to implementation that would be uniform with the Advisers Act standard in principle but vary in application with regard to particularized facts and circumstances, according to the committee. The IAC notes that this can be accomplished without sacrificing all differentiation between brokers and advisers; the same flexibility that makes it possible for the Advisers Act fiduciary duty to be adapted to varying services and business models can be adapted to broker-dealers.
“Making it clear that both broker-dealers and investment advisers, regardless of business model, are working as fiduciaries under a standard tailored to the functions they perform would simplify the issues for investors and the regulated community alike,” the IAC states.
Finally, the IAC recommends that the Commission test the effectiveness of Form CRS disclosures for investors. The recommendation opines that the testing should include unsophisticated investors without a clear understanding of the differences between brokerage and advisory accounts. If usability testing reveals that the disclosures do not achieve the intended purpose of reducing confusion and promoting informed decision-making, the Commission may need to make changes before finalizing the form, the committee explains.