The Securities and Exchange Commission voted by a 3-to-1 margin to finalize four agenda items that include new standards of conduct for broker-dealers' recommendations to retail investors, known as Regulation Best Interest, and a new interpretation of investment advisers' fiduciary obligations.

SEC Chairman Jay Clayton said the action by the SEC was long overdue.

“It became clear to me early during my confirmation process in 2017 that Commission action in this area would be both appropriate and timely,” Clayton said in his opening remarks prior to the vote.

The four-pronged rulemaking package is designed to align “reasonable investor expectations and the actual legal standards that apply to financial professionals,” address investor confusion over the different roles of brokers and advisers, and codify the increasingly complex regulatory framework of state and federal regulations, said Clayton.

Today's vote was the culmination of a debate that's spanned nearly two decades over broker-dealers' standards of conduct and the impact of conflicts of interest on average investors.

Under Reg BI, brokers will have four obligations to retail investors: disclosure, care, conflicts of interest mitigation, and compliance.

Reg BI will govern account recommendations, meaning the standards will have to apply to IRA rollover recommendations and distributions from workplace retirement plans. That addition was not specified in last year's proposed rule.

The care obligation requires all recommendations to be in retail customers' best interests, and requires a consideration of investment costs—but does not require the cheapest investments to be recommended.

The conflict of interest obligation requires brokers to mitigate or eliminate conflicts of interest, whereas the suitability standard simply requires that conflicts be disclosed.

The disclosure obligation requires all fees, costs, and conflicts to be documented to investors, and the compliance obligation requires firms to produce written policies to assure compliance with Reg BI.

Lone dissent

The Commission's sole Democratic member, Robert J. Jackson, was the lone dissenting vote on each item, with Chairman Jay Clayton, and Republican Commissioners Hester Peirce and Elad Roisman voting to pass the rules.

One of the commission's seats was temporarily vacated when Commissioner Kara Stein, a Democrat and staunch critic of the regulations in proposed form, left the SEC in January.

The cornerstone of Commissioner Jackson and consumer advocates' critique of Reg BI is that it allows brokers to give conflicted recommendations on securities so long as the conflicts are disclosed.

Those corners have long lobbied for a uniform fiduciary standard to be applied to broker-dealers and investment advisers.

Clayton, Peirce, and Roisman underscored the need to balance investor protections and choice in the investment services marketplace.

“Some have been quick to demonize suitability, and now best interest, and lionize fiduciary,” said Roisman. “In the real world, broker-dealers and investment advisers provide distinct services. One model is not inherently better.”

“The falling number of broker-dealers is a trend we want to arrest, not exacerbate,” said Peirce.

In his dissent, Commissioner Jackson said the rulemaking package fails to significantly raise the standards of conduct brokers owe retail investors, and claimed the new interpretation of fiduciary responsibilities under the Investment Advisers Act of 1940 will make advisers “not true fiduciaries.”

The rulemaking process boiled down to one question, said Jackson: Do investment professionals have to put investors' interests first?

“Today, the Commission's answer is 'No',” said Jackson. The “muddled” standards laid out in Regulation Best Interest will expose investors to conflicted advice, he said, and then likened the rulemaking process to “wrapping a policy choice in legalese.”

Consumer advocates question Chair Clayton's integrity

As strident as was Jackson's dissent, it was tempered compared to the criticisms by consumer advocates outside the SEC.

“Not only do we see the SEC plan as a step backwards for investors, we believe the Chairman is deliberately leading a false and misleading impression that his proposal will raise the bar for brokers and advisers,” said Christine Lazaro, president of Public Investors Arbitration Bar Association (PIABA), which represents investors in securities arbitrations, in a press call hosted with the Consumer Federation of America and Better Markets.

“However, that simply isn't true. We know that, the Chairman knows that, and the industry that is the only group that has endorsed these rules knows it as well,” added Lazaro.

Barbara Roper, director of investor protection at the Consumer Federation of America, said Chairman Clayton deliberately chose not to use the authority Congress granted the SEC in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to issue a uniform fiduciary standard for broker-dealers and registered advisers.

“The regulations are not a disappointingly-weak-but-modest improvement on the status quo,” said Roper. “They are a complete betrayal of the Mr. and Ms. 401(k) investors SEC Chair Jay Clayton pledged to protect when he undertook this rulemaking. They will mislead investors into expecting protections the rules do not deliver, and deprive them of protections they currently receive.”

Chair Clayton said criticisms of the rulemaking package are “misguided,” and along with Commissioner Peirce urged all stakeholders to understand the final regulations before judging their impact.

“A one-size-fits-all approach presents significant risk,” said Clayton of the decision to not implement a uniform standard for brokers and advisers. The upshot would be reduced investor choice and increased costs. “That would be a loss for our Main Street investors. A more tailored approach will better serve retail investors and markets.”

Changes in the final regs

Prior to Wednesday's vote, career staffers at the SEC presented on each of the four separate rules, and laid out distinctions between the final regulations and the proposals issued last year.

Brett Redfearn, director, division of trading and markets at the SEC, noted five enhancements Reg BI will have over the existing suitability standard that regulates brokers under FINRA rules, and insisted Reg BI will raise brokers' standard of care, and enhance customer protections and clarity in a way that will preserve the broker-dealer model and choice in the retail investor market.

While today's vote marks a momentous point in the 85-year history of the SEC, Commissioner Jackson suggested that the question of broker-dealers' obligations to investors would be revisited in the foreseeable future.

“Keep fighting, and encourage investors to seek out true fiduciary advice,” Jackson implored of consumer advocates. “I believe one day soon the Commission will do more,” he said, implying the rulemaking process could be reopened under a new Presidential administration, and under new SEC leadership.

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SEC passes new broker standards in Regulation Best Interest

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