New SEC and CFP Board Standards Starting June 30th Abandon Longstanding Principles that Treat Sales and Advice Differently
Regulators treated brokerage sales and fiduciary advice differently for years, stressing the harms and risks of conflicts of interest. Avoiding conflicts, if at all possible, was the norm. That was yesterday. Today, new standards reject these ideas, accept conflicts as okay and treat brokers and advisers much alike. The new standards depart from the key principle of the Investment Advisers Act of 1940.
Authors: Knut A. Rostad and Darren M. Fogarty*
Forward
“Rostad and Fogarty tell the story that these standards deserve attention because they abandon decades of established principles. They then offer selected remedies to help investors manage in this new era. The Securities and Exchange Commission’s Regulation Best Interest ignores the brokers’ advisory sales-talk and waters-down significantly brokers’ fiduciary duties. In fact, little remains. Hopefully, this rule will fail to achieve its purpose or is fixed before it brings true disasters on the securities markets. Otherwise, investors and the securities markets may pay the price.”
Tamar Frankel, Professor of Law Emerita
Boston University School of Law
Summary
The SEC and CFP Board pushed new standards in 2018 and 2019. Each will be enforced starting June 30th. Each seeks to avoid constraints of the Advisers Act of 1940, legal precedent, and common sense. Each seeks to transform advice standards. Their success basically rebrands conflicts of interest as okay. This is significant. This is why.
Investment advice once meant fiduciary advice. Today, investment advice, while called ‘best interest,’ now often means brokerage practices. The June 2019 SEC standards rulemaking culminates a ten-year effort to replace fiduciary principles with brokerage practices topped with more disclosure. BD sales practices now called ‘best interest’ advice are described in confusing and, sometimes, misleading ways. CFP Board standards introduced in March 2018 also blur lines separating advisers and brokers. “Business model” neutrality is the rallying cry. The standards treat advisers and brokers alike.
The standards ignore structural, business and legal differences that separate brokers and independent advisers. Brokers and advisers have different purposes, roles and functions. Brokers, in their commercial roles are incentivized to distribute and sell products for issuers or manufacturers in relationships of three. Advisers are compensated by clients as fiduciaries to clients in relationships of two.
The standards are an historic setback for investors. It’s not just that they rely on disclosure; their flaw is more fundamental. The standards replace Advisers Act thinking on “client first”, transparency, and obvious broker / adviser differences with caveat emptor thinking on “sales first”, confused disclosure, and contrived broker / adviser similarities.”
The standards implications for investors have not yet been widely discussed. While specific holes in SEC and CFP Board standards have been reported for years, their implications in their entirety have not. The finality of the passing of the Advisers Act thinking in federal regulation on June 30th should be.
The SEC and CFP Board standards start a new era. Regulators, adviser groups, adviser leaders, and experts should offer guidance and innovative ideas to bolster investor protections as these new standards take hold. Guidance is needed. Here are areas where the standards can still be enhanced.
First, provide concrete guidance to help CFPs mitigate or manage material conflicts. Second, acknowledge and rate broad differences among conflicts based on their magnitude, complexity, and opaqueness. Third, make customer comprehension testing of conflict disclosures the new normal. Fourth, provide consumers a score card to rate brokers and advisers. For CFP Board, reconsider the meaning of business model neutrality.
*Knut A Rostad is President and Founder of the Institute for the Fiduciary Standard. Darren M Fogarty is Research Analyst at the Institute. The Institute is a non-profit that exists to advance the fiduciary standard through research, education and advocacy. Small edits were made to this paper on May 5th, 2020.
Read the full paper or download the PDF.
