Regulation & Compliance

FSI Submits Comment Letter to SEC on Proposed Regulation Best Interest

To ‘promulgate a uniform standard of care for broker-dealers and investment advisers’

WASHINGTON, D.C. – 07AUG2018 —  Today, the Financial Services Institute (FSI) submitted its comment letter to the Securities and Exchange Commission (SEC) regarding its Regulation Best Interest Proposal.

The comment letter highlights several key points and issues including:

FSI has advocated for a uniform best interest standard of care for all professionals providing investment advice to retail clients since 2009.

The principles-based standard described in the proposal adequately provides the ability for it to address the needs of various business models and clients.

The proposed standard of care builds upon and fits within the existing regulatory framework.

FSI has advocated for a two-tier client disclosure regime that starts with a one-page, point-of-sale document. The proposed Customer Relationship Summary (Form CRS) meets aspects of this approach, however, some suggested changes include:

  • Shortening the proposed four-page Form CRS to one page with hyperlinks to more detailed disclosures, would allow investors to click through to more information on specific points of concern to them and would improve the likelihood that clients will understand and use the disclosures.
  • Allowing negative consent for electronic delivery.

FSI supports restricting the use of the terms “adviser” or “advisor” to those financial professionals who are registered as an investment adviser and dual registrants.

FSI supports harmonization of regulations between broker-dealers and investment advisers, particularly in areas in which current broker-dealer regulations provide a level of investor protections that investment adviser regulations do not, including:

  • Federal licensing and continuing education
  • Provision of account statements
  • Rules regarding custody of client funds and securities
  • Supervision, advertising and examination requirements.

FSI appreciates the opportunity to provide our comments on the proposal and looks forward to working with the SEC and other stakeholders as the rulemaking process continues.

Excerpts from the comment letter

Discussion
FSI appreciates the opportunity to comment on the Proposed Rulemaking Package. Since 2009, we have publicly supported a carefully-crafted, uniform best interest standard of care applicable to all professionals providing personalized investment advice to retail clients. Further, Congress specifically charged the SEC with evaluating the effectiveness of existing standards of care and delegated the authority to promulgate a uniform standard of care for broker-dealers and investment advisers. While it is not perfect, we believe that the Proposed Rulemaking Package provides a clear standard of care for financial professionals, including guidelines for managing conflicts of interest, while preserving investor access to the broad range of products

Overview
FSI has been actively engaged in the discussion surrounding the final form of a standard of care and has provided the SEC with detailed comments in response to earlier requests. In our response to SEC Chairman Jay Clayton’s (Chairman Clayton) request for information, which was made in anticipation of the SEC’s work to formulate the best interest standard proposal, FSI suggested several key questions for the SEC to address, including defining a best interest standard of care; determining how firms and financial professionals would demonstrate compliance; and ensuring investors retain access to investment products, services and advice.

The Proposed Rulemaking Package largely addressed these suggestions. While Proposed Regulation Best Interest clearly extends to broker-dealers a duty to act in the customer’s best interest – that is, putting the customer’s needs first – the Commission has properly adopted a principles-based standard allowing firms to tailor their practices to their business model and clients. Broker-dealers would demonstrate compliance with this duty by:

1) disclosing key facts about the customer relationship, including material conflicts of interest;

2) exercising reasonable diligence, care, skill and prudence to understand the product and have a reasonable basis to believe that product is in the customer’s best interest; and

3) establishing and enforcing policies and procedures reasonably designed to identify, disclose, and mitigate or eliminate conflicts of interest arising from financial incentives. We applaud the SEC for acknowledging that conflicts will inevitably exist, but must be managed appropriately.

While Proposed Regulation Best Interest clearly extends to broker-dealers a duty to act in the customer’s best interest - that is, putting the customer’s needs first - the Commission has properly adopted a principles-based standard allowing firms to tailor their practices to their business model and clients

Clearly Defined Duty to Act in the Best Interest of a Retail Customer
Proposed Regulation Best Interest requires that, when making a recommendation to a retail customer, a broker-dealer has a duty to act in the best interest of the retail customer at the time a recommendation is made, without putting the financial or other interest of the brokerdealer ahead of the retail customer. Articulating the standard in this way correctly recognizes that a broker-dealer’s financial interest can and will inevitably exist, but that interest cannot be the predominant motivating factor. As we have previously commented, a best interest standard does not require broker-dealers to maintain a conflict-free culture, but rather that conflicts be adequately addressed to ensure that the broker-dealer’s interests align with those of its customer.

Thus, a best interest standard must be designed to appropriately address conflicts of interest because they may arise in any relationship where a duty of care or trust exists between two or  more parties. Indeed, being completely “conflict free” is not possible for financial professionals, as Wall Street Journal columnist Jason Zweig explains, “All financial advis[ors]—like all people who perform a service for anyone else, including journalists—have conflicts of interest. That’s true regardless of whether they work for someone else or for themselves, whether they earn fees or commissions, or whether they call themselves ‘fiduciaries’ who put clients’ interests ahead of their own.”

Chairman Clayton recognized this in remarks before the House Financial Services Committee, when he said “the proposed broker-dealer best interest obligation draws from the principles underlying an investment adviser’s fiduciary duty, recognizing that both broker-dealers and investment advisers often provide advice in the face of conflicts of interest.”

Read the entire comment-letter here.

 

 

About the Financial Services Institute (FSI): The Financial Services Institute (FSI) is the only organization advocating solely on behalf of independent financial advisors and independent financial services firms. Since 2004, through advocacy, education and public awareness, FSI has successfully promoted a more responsible regulatory environment for more than 100 independent financial services firm members and their 160,000+ affiliated financial advisors – which comprise over 60% of all producing registered representatives. We effect change through involvement in FINRA governance as well as constructive engagement in the regulatory and legislative processes, working to create a healthier regulatory environment for our members so they can provide affordable, objective advice to hard-working Main Street Americans. For more information, please visit financialservices.org.