SIFMA Comments on Regulation: Best Interest

Regulation strengthens investor protections while preserving investor choice

Washington, D.C., June 14, 2018 – In an Investor Advisory Committee meeting on “Regulation: Best Interest” hosted today by the SEC, SIFMA executive vice president and general counsel Ira Hammerman emphasized SIFMA’s longstanding support of the creation of a heightened best interest standard for broker-dealers that builds upon the existing, robust, regulatory regime under the federal securities laws.

“We were very encouraged to learn that the SEC, as the preeminent markets regulator, and under Chairman Clayton’s leadership, has engaged in this formal rulemaking,” said Mr. Hammerman.  “We continue to support the highest standards for our industry.  SIFMA commends the SEC for proposing a new best interest standard under the Exchange Act that not only clearly and significantly raises the bar from the current suitability standard under FINRA Rules, but also incorporates the intended principles and goals of the former DOL fiduciary rule that it is replacing.  By any measure, the SEC’s proposed best interest standard materially exceeds the existing FINRA suitability standard to the benefit, and for the protection, of retail customers.”

Discussing the ways in which the proposed Regulation adds further protections for investors while still preserving investor access and choice, Mr. Hammerman noted the SEC’s proposed new standards, coupled with existing standards, require that a broker-dealer making a recommendation must:

  • act in the retail customer’s best interest, without placing the financial or other interest of the broker-dealer ahead of the retail customer’s interest;
  • act with diligence, care, skill and prudence, and carefully weigh the cost of the security as a factor in determining whether to make the recommendation;
  • meet his or her best execution, fair prices and commissions, and just and equitable principles of trade obligations, among many others, under FINRA Rules; and
  • not make misleading statements or omissions of fact.

He also noted the SEC’s proposed standards include the essential disclosure and risk mitigation elements of the DOL’s Best Interest Contract, but the SEC proposal is more effective, given the disclosures are specifically tailored to the broker-dealer business model, and are intended to be in summary, digestible form so they better serve investors.  In addition, the SEC’s new standard is even better and more protective than the DOL rule because it applies to all retail customer accounts, not just retirement accounts, and is backed by the accountability mechanism of SEC enforcement.

“Reg BI recognizes that brokerage accounts are the right fit for many investors, where fee-based accounts are not,” said Mr. Hammerman.  “Thus, Reg BI wisely seeks to preserve and improve upon the brokerage model for current and future generations of investors.  We believe it represents a clear path forward that is both workable for the industry and preserves investor choice.”

SIFMA is reviewing the proposed Regulation with its members and will make suggestions for improvement by the comment period deadline of August 7.  Areas where SIFMA is likely to suggest improvements include narrowing the definition of “retail customer” so it does not apply to registered investment advisers, bank trusts, or family offices; clarifying the definition of “material conflicts of interest” so it is not overly broad; and encouraging the SEC to consider certain practical implications on the proposed limits on the use of the “advisor” and “adviser”, such as dual-registrants who may go through periods (including the ramp-up process) when they do not have any advisory clients.

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SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

Regulation strengthens investor protections while preserving investor choice

Washington, D.C., June 14, 2018 – In an Investor Advisory Committee meeting on “Regulation: Best Interest” hosted today by the SEC, SIFMA executive vice president and general counsel Ira Hammerman emphasized SIFMA’s longstanding support of the creation of a heightened best interest standard for broker-dealers that builds upon the existing, robust, regulatory regime under the federal securities laws.

“We were very encouraged to learn that the SEC, as the preeminent markets regulator, and under Chairman Clayton’s leadership, has engaged in this formal rulemaking,” said Mr. Hammerman.  “We continue to support the highest standards for our industry.  SIFMA commends the SEC for proposing a new best interest standard under the Exchange Act that not only clearly and significantly raises the bar from the current suitability standard under FINRA Rules, but also incorporates the intended principles and goals of the former DOL fiduciary rule that it is replacing.  By any measure, the SEC’s proposed best interest standard materially exceeds the existing FINRA suitability standard to the benefit, and for the protection, of retail customers.”

Discussing the ways in which the proposed Regulation adds further protections for investors while still preserving investor access and choice, Mr. Hammerman noted the SEC’s proposed new standards, coupled with existing standards, require that a broker-dealer making a recommendation must:

  • act in the retail customer’s best interest, without placing the financial or other interest of the broker-dealer ahead of the retail customer’s interest;
  • act with diligence, care, skill and prudence, and carefully weigh the cost of the security as a factor in determining whether to make the recommendation;
  • meet his or her best execution, fair prices and commissions, and just and equitable principles of trade obligations, among many others, under FINRA Rules; and
  • not make misleading statements or omissions of fact.

He also noted the SEC’s proposed standards include the essential disclosure and risk mitigation elements of the DOL’s Best Interest Contract, but the SEC proposal is more effective, given the disclosures are specifically tailored to the broker-dealer business model, and are intended to be in summary, digestible form so they better serve investors.  In addition, the SEC’s new standard is even better and more protective than the DOL rule because it applies to all retail customer accounts, not just retirement accounts, and is backed by the accountability mechanism of SEC enforcement.

“Reg BI recognizes that brokerage accounts are the right fit for many investors, where fee-based accounts are not,” said Mr. Hammerman.  “Thus, Reg BI wisely seeks to preserve and improve upon the brokerage model for current and future generations of investors.  We believe it represents a clear path forward that is both workable for the industry and preserves investor choice.”

SIFMA is reviewing the proposed Regulation with its members and will make suggestions for improvement by the comment period deadline of August 7.  Areas where SIFMA is likely to suggest improvements include narrowing the definition of “retail customer” so it does not apply to registered investment advisers, bank trusts, or family offices; clarifying the definition of “material conflicts of interest” so it is not overly broad; and encouraging the SEC to consider certain practical implications on the proposed limits on the use of the “advisor” and “adviser”, such as dual-registrants who may go through periods (including the ramp-up process) when they do not have any advisory clients.

-30-

SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.