Does the SEC's new interpretation of the investment adviser standard diminish it? Depends who you ask

Some observers say the language waters down the fiduciary standard, while others say the word choice is inconsequential

Jun 11, 2019 @ 2:41 pm

By Mark Schoeff Jr.

One of the most controversial parts of the advice reform package the Securities and Exchange Commission approved last week is its interpretation of the standard of conduct for investment advisers.

But whether the SEC has diminished the fiduciary duty to which advisers must still adhere under the new rules depends on who's doing the interpreting.

Just before he cast the lone vote against the rule package, Democratic SEC commissioner Robert Jackson Jr. said the 41-page interpretation lowers the fiduciary standard advisers must meet.

"The final guidance the majority approves today removes language from last year's proposal stating that the law 'requires an investment adviser to put its client's interests first,'" Mr. Jackson said in his statement. In a fact sheet, he said the guidance instead says an adviser must not "subordinate its clients' interests to its own."

SEC investor advocate Rick Fleming also criticized the adviser standard interpretation.

"In my view, the new fiduciary interpretative release weakens the existing fiduciary standard by suggesting that liability for nearly all conflicts can be avoided through disclosure," Mr. Fleming said in a statement after the vote.

Brian Hamburger, president and chief executive of MarketCounsel, a business and regulatory consulting firm, said critics of the adviser standard interpretation raised valid concerns.

"From what we've seen, it's very clear the SEC has watered down the generally accepted descriptions of an adviser's fiduciary duty," Mr. Hamburger said. "An adviser will not be able to say she legally has to put the client's interest first."

But Karen Barr, president and chief executive of the Investment Adviser Association, said the SEC interpretation won't change how advisers approach working with clients.

Ms. Barr said that over the years the SEC has used interchangeably phrases regarding putting a client's interest first, not putting your own interests ahead of your client's, and not subordinating a client's interest to your own.

"In practice, these three terms have the same practical effect," she said. "The duty to put your client first is still our duty."

Ms. Barr pointed to parts of the interpretation — such as language on page 23, which says that disclosure and consent alone do not satisfy an adviser's duty to act in a client's best interest — as upholding a tough adviser standard.

"People can look at this interpretation and select phrases that concern them or comfort them," she said.

The interpretation is one part of a four-part rulemaking packaging. The SEC sought to clarify the adviser's standard while promulgating a new rule, Regulation Best Interest, that is designed to raise the broker standard above current suitability. Advisers and brokers would continue to be regulated separately.

Mr. Hamburger said the result will be a blurring of the line between an adviser and a broker.

"It really takes away the marketing advantage advisers had over brokers," he said. "It's going to be harder for advisers to promote that they have a much higher standard of care than broker-dealers."

It's impossible for any financial professional to operate conflict-free, Ms. Barr said. But advisers still have the upper hand when it comes to providing untainted advice.

"The kinds of conflicts investment advisers have are less acute than the conflicts many broker-dealer models have," she said.

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