&l;p&g;On April 18, 2018, the Securities and Exchange Commission (&a;ldquo;SEC&a;rdquo;) released a 1,000-page set of proposals intended to limit brokers and investment advisers conflicts of interest for non-retirement and retirement accounts. The SEC&a;rsquo;s proposal, which has become known as the &a;ldquo;best-interest proposal&a;rdquo;, is subject to a 90-day comment period and revisions before being finalized.&a;nbsp; The SEC fiduciary rules comes after the Labor Department&a;rsquo;s (&a;ldquo;DOL&a;rdquo;) &a;ldquo;fiduciary rule&a;rdquo; was overturned by the Fifth Circuit Court of Appeals in March 2018. The administration has not made clear whether it will appeal the Fifth Circuit&a;rsquo;s decision.
&l;img class=&q;dam-image bloomberg size-large wp-image-42336447&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/42336447/960×0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018. Clayton unveiled a new approach that will attempt to address legal and regulatory uncertainties that were largely triggered by the Labor Department&s;s rules. Photographer: Yuri Gripas/Bloomberg
In 2010, &l;a href=&q;https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Dodd-Frank&l;/a&g; empowered the SEC to impose regulations requiring a fiduciary duty by broker-dealers to their customers. Currently, brokers working with customers on non-retirement accounts are governed by a much weaker &a;ldquo;suitability&a;rdquo; standard – the investment must be suitable for you, but not necessarily the best option.
The primary distinction between broker-dealers and registered investment advisers is how each group gets regulated. Investment advisers have a fiduciary duty to their clients that compels them to put their clients&s; interests ahead of their own. Whereas, broker-dealers that work with the public typically become members of the self-regulatory Financial Industry Regulatory Authority, or FINRA. Broker-dealers owe a duty of fair dealing with their clients, which is generally seen as being less burdensome than the fiduciary duties that registered investment advisers owe their clients.&a;nbsp; The new SEC fiduciary rules are seemingly trying to make clearer for investors whether they&a;rsquo;re doing business with a broker or an investment adviser. Investment advisers and broker-dealers (and their respective associated persons) would be required to provide retail investors with a written relationship summary. However, one of the main criticisms of the new SEC rule is that it does not seek to impose &q;uniform&q; conduct standards on advisers and brokers.
Under the proposed SEC &a;ldquo;best interest&a;rdquo; rule, broker-dealers would be required to disclose their financial conflicts of interest, at minimum mitigate any conflicts of interest they may have and &a;ldquo;exercise reasonable diligence, care, skill and prudence&a;rdquo; to ensure they are selling products and carrying out transactions that are in a client&a;rsquo;s best interest. The SEC rule relies heavily on disclosure. It requires brokers to provide a written document to clients stating whether a broker is acting only as a salesperson, or has a duty of loyalty to the client&a;rsquo;s interests.&a;nbsp; Of note, the SEC proposal did not explicitly define &a;ldquo;best interest&a;rdquo; for brokers.
The proposed SEC Fiduciary rule would impose a best interest standard for financial advisers and broker-dealers.&a;nbsp; In other words, the rule aims to hold financial professionals to higher standards of conduct, even if they are registered as broker/dealers rather than advisers.&a;nbsp; In addition, the SEC rules would apply to both retirement and non-retirement accounts, whereas, the DOL fiduciary rule only applied to retirement accounts.
For the majority of retirement account investors, the proposed SEC &a;ldquo;best interest&a;rdquo; rule is expected to offer greater protection against any conflict of interest involving an investment adviser or broker. &a;nbsp;However, it is still not known how the proposed SEC fiduciary rule will compare to the now defunct DOL fiduciary rule for purposes of regulating financial advisers and brokers.
For IRA or 401(k) Plan investors using a self-directed IRA to make alternative asset investments, such as real estate, it is believed that the proposed SEC fiduciary rule would have very little impact. The SEC rule would not have jurisdiction over individuals or entities that do not sell securities, such as self-directed IRA custodians or insurers. Like the DOL fiduciary rule, the proposed SEC rule only addresses investment advice offered by investment advisers or broker dealers.&a;nbsp; In the case of a self-directed IRA, the IRA custodian is not permitted to offer any investment advice and is thus, not considered a fiduciary.
April 30 is the day the DOL must decide whether to appeal the Fifth Circuit&a;rsquo;s ruling overturning the fiduciary rule.&a;nbsp; If it doesn&a;rsquo;t, it can be expected that the SEC will work with the DOL, as well as take into account any public comments received, to help enhance the SEC&a;rsquo;s proposal.&l;/p&g;