Independent Broker Dealer Consortium

SEC “Best Interest” Rule Reaction, DOL Rule At Its End

It’s been two weeks since the SEC Best Interest Rule was unveiled, and the three-part proposal is drawing praise, criticism and much scrutiny. As expected, political and industry reaction is coming in from many quarters. Meanwhile, the fate of the DOL fiduciary rule has been decided by the Fifth Circuit Court of Appeals which denied several motions for reconsideration of their decision to vacate the rule. As expected, none of this has slowed states’ actions, as they keep promulgating suitability, fiduciary duty and disclosure standards. Here’s a recap of the latest activity.


What is now referred to as the SEC Best Interest Rule or “Reg. BI” is really three proposals. The firstwould require a broker-dealer who gives recommendations to a retail investor to act in the best interests of that investor. This new standard would require suitability determinations, disclosures—including of all “key facts” that may suggest conflicts of interest—and additional compliance obligations. The second proposal takes the form of more fulsome interpretive guidance for advisers. The SEC proposal would make more explicit the “federal fiduciary” obligations required by investment advisers under the law. Finally, the SEC would require that both broker-dealers and investment advisers use a new Client Relationship Summary or “CRS” with their retail investors. The short form would highlight key differences in the types of services offered, as well as the legal standards of care for each. The CRS proposal also would restrict certain broker-dealers servicing retail investors from using the terms “adviser” or “advisor” as part of their name or title.


The Securities Exchange Commission voted 4-1 in favor of releasing the package of proposals. In recent testimony before the House Financial Services and General Government Subcommittee, SEC Chairman Jay Clayton acknowledged that “we have been thinking about these issues for over 20 years, and about this rulemaking for nearly a year.” He argued that the rulemaking package will address the concerns of retail investors who are confused about their relationship with an investment professional: “Put bluntly, we want investors to understand who they are dealing with (e.g., what category their investment professional falls into) and, then, what that means and why it matters (e.g., how they are compensated).”

Despite the vote, several commissioners reportedly expressed opposition to the regulation as currently formulated. These include Kara Stein (who voted against) and Commissioners Michael Piwowar, Hester Peirce and Robert Jackson, each of whom contended that aspects of the rule were unclear in fundamental ways. Key disagreements centered on the failure to include a definition in the text for the term “best interest,” and whether the proposed standards would delimit services offered by broker-dealers or drive up costs to investors.


Several industry groups gave preliminary reaction to the proposal, though all acknowledge the need to carefully review the details.

SIFMA president Kenneth Bentsen issued a statement contrasting the SEC actions with the DOL’s issuance of the fiduciary rule. He stated: “We are pleased that the SEC, as the preeminent markets regulator, has initiated the formal rulemaking process…SIFMA has long supported the creation of a heightened best interest standard for broker-dealers that builds upon the existing, robust, broker-dealer regulatory regime.”

Investment Adviser Association President Karen Barr continued the IAA’s advocacy of the fiduciary standard, saying, “the Investment Adviser Association has long advocated that all financial services professionals providing investment advice be held to a standard of conduct as stringent as the one that binds investment advisers – the well-established fiduciary duty under the Investment Advisers Act of 1940.” As to the interpretive guidance, she noted that “the fiduciary duty under the Investment Advisers Act is well understood and has served investors, the economy and the capital markets well for more than 75 years.”

In a joint statement issued by Rep. Maxine Waters (CA), Rep. Bobby Scott (VA.), Senator Sherrod Brown (OH) and Sen. Patty Murray (WA.), the lawmakers urged the SEC “to issue a final rule that matches the Department of Labor rule’s protections, and requires financial advisers to put the interests of savers and retirees first – not their own.”


As previously discussed, in a split decision, the Fifth Circuit vacated the fiduciary duty rule after a finding that the DOL exceeded its statutory authority by promulgating it. (Shortly thereafter, the Department of Labor stopped enforcing it.) In a last ditch effort, attorneys general from New York, California and Oregon and the AARP petitioned the court to intervene and reconsider the Fifth Circuit panel’s decision. Their motion was denied, thereby effectively ending the 2016 rulemaking, barring an unlikely appeal to the Supreme Court. SIFMA issued the following statement on the Fifth Circuit’s denial: “We are pleased … that the Department of Labor’s unlawful 2016 fiduciary rule is at an end. The SEC, not the DOL is the appropriate regulator in this area, and we look forward to working with the SEC on the current proposed rulemaking to establish a best interest standard across all accounts, and not just retirement accounts.”


State legislators and regulators responding to retail investor complaints don’t expect the federal debate over regulatory standards to be resolved any time soon. As previously reported, states have taken to establishing suitability, fiduciary duty and disclosure standards for investors within their jurisdictions. A list of the more recent state initiatives can be found here. It is worth noting that on April 27th, the New York Department of Financial Services updated a proposed regulation to amend its suitability standards. The proposed regulation would incorporate a best interest standard of care for all sales of life insurance and annuity products.


The SEC Best Interest proposal is somewhat of a compromise between the regulatory status quo and the now-deceased fiduciary duty rule. Practically speaking, the imposition of a final rule, whatever that may look like, is far off. The disparate reaction by the Commissioners, market participants and political leadership assure that this process will take time. Assuming required transition periods, the most optimistic projection puts implementation sometime in late 2020. Given the delay at the federal level and the uncertainty resulting from future challenges in the courts, the states continue to have running room to impose their own solutions.

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