Almost exactly nine years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the Securities and Exchange Commission the authority to regulate investment advice, the agency has finally set new rules.
However, the new rules are not to everyone's liking. Indeed, Rep. Maxine Waters, D-Calif., chairwoman of the House Financial Services Committee, opposed the SEC's rules and pushed through the committee an amendment to the Financial Services and General Government Appropriations Act of 2020 that prohibits any of the money appropriated by the bill from being spent by the SEC to enforce its rule.
The prospects of the amendment in the full House of Representatives and the Senate are unclear.
The package of new rules, according to the SEC, is "designed to enhance and clarify the standards of conflict applicable to broker-dealers and investment advisers, help retail investors better understand and compare services offered, and make an informed choice of the relationship best suited to their needs and circumstances."
The rules, commonly known as Reg BI, in effect replace the Department of Labor's fiduciary rule, which was blocked by a court decision in March 2018. That rule would have required advisers and brokers to put their clients' interests before their own when advising on retirement accounts such as 401(k) plans and individual retirement accounts.
Among other things, the SEC's package of rules requires investment advisers and brokers to act in their clients' best interest, and to pro- vide clients at the beginning of relationships with forms that explain services, fees and conflicts.
While critics say it does not go as far as the DOL's fiduciary rule in regulating brokers, it regulates all broker advisory client interactions. The DOL rule applied only to those related to retirement fund transactions, for example, when a broker advised a client to pull his or her money from a 401(k) plan and buy an annuity that earned the broker an undisclosed commission, or invest in stocks the broker suggested that also benefited the broker.
The SEC's new rule, requiring investment advisers and brokers to act in their clients' best interest, would seem to prohibit such transactions.
Critics are focused on the word "fiduciary" and they likely will not be happy until brokers are clearly identified as fiduciaries.
A fiduciary's role has many legal obligations, including the primary one of managing the assets of an investor or group of investors in a way that directly benefits the investor, rather than seeking personal profit.
The SEC's new rule would seem to demand that kind of behavior from advisers and brokers, even though it does not specifically use the word "fiduciary."
Nevertheless, some states are preparing their own fiduciary rules. New Jersey, Nevada and Massachusetts have signaled their intent to produce their own rules.
These states should hold off. The SEC's new package of rules tries to help investors without shaking up the industry too dramatically, as the DOL's rule seemed likely to do. And the financial services industry should not have to deal with a number of different fiduciary standards.
In addition, the DOL has said it will introduce a revised fiduciary rule in September.
The states and other critics should give the new rules time to work. If they are found wanting in that investors, particularly retirees or those approaching retirement, are still being taken advantage of by brokers and advisers, the rules can be tightened.