In a move that drew vastly different responses from two camps of stakeholders, commissioners at the Securities and Exchange Commission, in a series of 3-1 votes, approved a new standards-of-conduct package for brokers dispensing financial advice.
The commission's three Republican members, including Chairman Jay Clayton, voted on June 5 in favor of each of the package's four measures. Robert Jackson Jr., the commission's lone Democrat, dissented each time.
The package is commonly known as Reg BI, for its centerpiece best-interest standard, which compels brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts. Currently, brokers are subject to a suitability standard that means they must provide advice that is merely suitable to their clients' situations. Critics, including Mr. Jackson, said the measure is too ambiguous and does not establish a legally enforceable standard. The other commissioners and SEC staff who spoke disagreed.
The new rules do not affect retirement plans, except some small 401(k) plans served by brokers, said Fred Reish, a Los Angeles-based partner for Drinker Biddle & Reath LLP. But he noted that financial professionals who provide advice to retirement plan participants, including rollover recommendations, are subject to the new rules.
There were two general schools of thought on the vote. Advocates for the broker-dealer and insurance industries largely have opposed changing the current suitability standard and expanding disclosure and compliance responsibilities of these firms, noted David G. Tittsworth, a lawyer at Ropes & Gray LLP in Washington and former president and CEO of the Investment Adviser Association.
On the other side, investment advisory and financial planning groups, consumer advocates and state regulators generally have been aligned in urging the SEC to impose a fiduciary duty standard on brokers that provide investment advice to retail customers.
"This is a contentious debate that's been going on for two decades," Mr. Tittsworth said.
Since the SEC commissioners unveiled the package in April 2018, Mr. Clayton has said he wanted to preserve the broker-advice option — rather than requiring all brokers that provide advice to register as investment advisers and be subject to the Investment Advisers Act fiduciary duty standard, which is more stringent.
The new package also includes a client relationship summary, or Form CRS, which requires firms to disclose to retail investors the nature and scope of their services, the types of fees customers would incur, conflicts of interest faced by the firm and the firm's disciplinary history.
Moreover, a standard of conduct for investment advisers says that advisers have a duty to act and provide advice that is in the best interest of the client.
Lastly, the package includes an interpretation of "solely incidental" — which references a provision in the Investment Advisers Act of 1940. The interpretation exempts broker-dealers giving investment advice from registering under the Advisers Act if their advice is "solely incidental" to the conduct of their business as a broker-dealer and they don't receive "special compensation" for the advice.
The final version of the interpretation makes clear that institutional investment managers continue to be subject to the duties of care and loyalty under the well-established umbrella of the disclosure-based fiduciary duty governing advisory activities, Mr. Tittsworth said. The original version focused on an investment adviser's duty to retail customers, which led to some uncertainty as to what changes might be made.
Steve Nelson, CEO of the Institutional Limited Partners Association in Washington, said the SEC "failed to seize the opportunity to improve clarity and consistency around the fiduciary obligations that private equity advisers owe to their clients. Based on the ruling, private equity advisers will not be required to put the fund's interest ahead of their own."