updated 2:11 PM CET, Oct 31, 2023

SEC votes 3 to 1 in favor of 'Regulation Best Interest,' as debate over its merits continues

As expected, the U.S. Securities and Exchange Commission on Wednesday approved a package of controversial new rules governing the way "broker/dealers" will sell their investment products after June 30, 2020, as debate about the merits of the new regime – and whether it goes far enough – continued across the country, and especially in Washington.

The vote was 3 to 1, with the dissenting vote cast against all four items on the day's ballot by Commissioner Robert Jackson Jr., the regulator's sole Democrat.

SEC chairman Jay Clayton, and commissioners Hester Peirce and Elad Roisman, voted in favor of the regulations.

In a statement on Wednesday after the vote, Jackson said he had hoped that the rules the SEC was about to introduce to U.S. consumers  "would significantly raise the standard for investment advice in this country” – but that, instead, they would not. 

"Rather than requiring Wall Street to put investors first, today's rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice," he said. 

"Even worse, contrary to what Americans have heard for a generation, the commission today concludes that investment advisers are not true fiduciaries.” Jackson was referring here to the fact that since 1940 in the U.S., "Registered Investment Advisers" have been bound by a "fiduciary duty" included in the Investment Adviser Act, a 1940 law that established the framework under which American RIAs have carried out their work on behalf of their clients ever since.

Broker/dealers are not covered by this act, unless they become RIAs.  

"Meanwhile, instead of strengthening the standards that apply to brokers, the [SEC] is poised to adopt an appallingly weak interpretation of the Investment Advisers Act fiduciary duty, which sends the message that outright fraud is the only thing investment advisers can’t disclose away," Jackson said.

Echoing Jackson's criticism was the Consumer Federation of America, whose director of investor protection, Barbara Roper, said the SEC, in approving the package of regulations on Wednesday, was "throwing ‘Mr. and Ms. 401(k)’ under the bus."

She added: “These new rules seriously erode the [SEC's] traditional interpretation of the Advisers Act fiduciary standard, giving brokers virtually unlimited ability to act as advisers, while simultaneously failing to regulate them accordingly, and making it easier for brokers to mislead their customers into believing they are getting trusted, best interest advice when they are actually getting investing recommendations biased by toxic conflicts of interest.

"The modest steps the Commission appears to have adopted to ‘enhance’ its proposed best interest standard for brokers – applying the standard to account opening recommendations, explicitly requiring brokers to consider costs, and tweaking the obligations that apply when brokers explicitly agree to monitor accounts – cannot compensate for the standard’s fundamental weakness. Investors will suffer real financial harm as a result of this best interest bait and switch.”

Clayton, though, defended the regulations, saying they represented an "action" that was "long overdue."

In the SEC's official announcement of its adoption of what it called "rules and interpretations to enhance protections and preserve choice for retail investors in their relationships with financial professionals," Clayton noted that these new rules had been actively under consideration by the SEC "for nearly two decades."

"This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

Obama-era 'fiduciary rule'

As reported, the SEC stepped into the best interests issue after the Trump administration allowed an Obama-era "fiduciary rule," designed to raise the standards of advice provided by U.S. broker/dealers to bring them in line with RIAs, to be vacated, helped by pressure from major financial services companies that prefer the current regulatory regime. 

At issue is whether the current "suitability standard" for investment products should be replaced by a "fiduciary rule" type of standard, which would require those advising on and selling investment products to ensure that the products' sale was in the "best interests" of the client and not, for example, them, or the product provider. 

The process of the dismantling of the Obama fiduciary rule caught the eye of U.S. journalists and American consumers alike in 2017 and 2018, and soon, pressure on lawmakers and regulators like the SEC to do do something, or to appear to be doing something, became unavoidable. A number of U.S. states, including Nevada, Connecticut, New York, Maryland, New Jersey and Illinois began drafting and implementing their own best interest-types of regulations. 

In its coverage today, InvestmentNews, a U.S. financial services news website, described the SEC regulations approved on Wednesday as poised to "make the most significant changes to investment advice standards [in the U.S.] in more than two decades."