Stewardship Standards

Vincent explores the debate of Industry Standards, Duties, Best Practices and Regulatory Trends

The views and opinions expressed in this blog are those of Vincent Micciche and do not necessarily reflect those of LifeMark Securities

Synopsis and Analysis of the SEC Best Interest Proposal


During his confirmation hearings in early 2017, SEC chairman Jay Clayton clearly stated that his highest priority was to propose regulation that would harmonize the professional standards that apply to financial advisors, whether they be insurance agents, financial planners, securities brokers or investment advisors. He would do this by engaging the Department of Labor, FINRA and the State Securities and Insurance regulators.

Since last June, the commissioners have gathered information and identified key questions that would need to be considered in forming their final proposal. Those questions were:
•    How many people would be affected by changes?
•    How would products change?
•    How would changes impact the cost and quality of advice?
•    Would changes increase or decrease the risk to investors?
•    Can advisors demonstrate compliance?
•    Can we effectively enforce?

The commission wanted the framework to be straightforward and focused on preserving investor’s choice and access to investments while improving investor protection. It hopes to achieve this by mandating clear disclosures, raising the broker/dealer standard to “Best Interest” and clarifying investment advisors’ standards of conduct.

I certainly felt that this was a reasonable criteria and prudent approach to designing a new rule that would result in the creation of a uniform fiduciary standard for the financial services industry. As you know, this is a position strongly advocated by LifeMark Securities.

On Wednesday 4/18/2018, the commission panel reluctantly voted to approve the over 1,000-page proposal. Each of the Commissioners that voted in favor voiced serious misgivings while Commissioner Kara Stein dissented completely. This quote probably best summarizes her position; “Despite the hype, today’s proposals fail to provide comprehensive reform or adequately enhance existing rules.” I also recall her saying something to the effect of “we should call this Regulation Status Quo.” She was highly critical of the proposal in its entirety and felt that it fell short of accomplishing any of the previously stated goals of the commission.

What the Proposal Will Do

In a nutshell, the proposal, which is formally called “Regulation Best Interest,” would impose three primary obligations on Broker/Dealers:

Brokers must disclose the key facts about their relationship with their customers.

Hoping to alleviate confusion, both brokers and RIA’s would need to create and disseminate Form CRS (client summary disclosure) that would contain standardized information that highlights the differences in services offered, legal standards that apply, fees and conflicts of interest. Notably, this disclosure form will be limited to 4 pages.

A broker must exercise reasonable diligence, care, skill and prudence to understand the product, have a reasonable basis to believe that the product is in the customer’s best interest, and have a reasonable basis to believe that a series of transactions is in the client’s best interest. 

If you think this sounds strikingly similar to the FINRA Suitability Rule 2111, you are correct. It is essentially a cut and paste.

Brokers must establish, maintain and enforce policies and procedures reasonably designed to identify and, at a minimum, disclose and mitigate conflicts of interest arising from financial incentives. Other material conflicts must at least be disclosed.

This is a big point of contention for the critics of this rule. Clearly, this language creates a “reasonability” standard for broker/dealers as opposed to the stricter “full and fair” standard that applies to RIA’s.

In addition to these three pillars, the proposal will restrict the use of the label “adviser” or “advisor” to Registered Investment Advisors only.

What the Proposal Does Not Do

  • It does not create or impose a fiduciary standard on broker/dealers.

  • While it requires acting in a client’s “Best Interest,” it does not define “Best Interest.”

  • It does not have any effect on Insurance Agents.

  • It does not require the brokers to provide customers with the best option available.

  • It does not create a private right of action or right of rescission, nor does it intend to.

  • It does not prohibit conflicts of interest.


After all the hype, the Best Interest Rule essentially mirrors the present suitability standard and increases the disclosure obligations of broker/dealers. Does it really take a thousand pages to do that? Talk about overkill!

I recall a conversation nearly two years ago with Don Trone, a noted authority on fiduciary standards, where he forecasted that the DOL Rule would be a disaster and ultimately cause a lowering of standards within the industry. What Don was basically saying was that the DOL Rule was, in no way, a fiduciary rule. Instead, it was a “Best Interest” rule. Ironically, the SEC proposal, which many fiduciary advocates had hoped would be a true uniform fiduciary standard following common law and section 206 of the Investment Advisors Act, also falls woefully short. Arguably, the SEC proposal is a watered-down version of the DOL Rule for two main reasons; It does not require a broker to assume a fiduciary status in all transactions and; It likely does not provide for a private right of action as a remedy for a breach of duties. 

The SEC proposal can be considered a victory for the opponents of a Uniform Fiduciary Standard. On the other hand, it is a setback for advocates of a uniform standard as it clearly delineates broker/dealers and RIA’s and establishes different rules and standards for each. 

The good news is that firms, like LifeMark Securities, that voluntarily assume a fiduciary status when providing advice will easily distinguish themselves from those that do not. This will, doubtless, create a competitive advantage for fiduciary firms.

If you are a broker, you should be asking yourself some important questions; Does my firm acknowledge and declare a fiduciary status when dealing with customers? Does my firm have a fiduciary training program in place that leads to certification? Is my firm reactive or proactive?

For example, over a year ago, LifeMark Securities adopted a comprehensive disclosure document that is in use with its customers today. You can view it here: http://www.lifemark.com/Portals/lifemark/Docs/BIC.pdf
You will see that this disclosure document exceeds the requirements proposed in the Best Interest Rule. This is an example of proactive leadership.

If you are an investor, you should be asking your broker if he or she is a fiduciary. The answer should be a simple yes or no. If they say something like “I always act in my customer’s best interest,” they dodged the question and you should probably continue shopping for a fiduciary advisor.

The commission has opened a 90-day comment period and I strongly encourage all of you to weigh in. We have a real opportunity now to eliminate confusion and regulatory ambiguity. This is a prime opportunity to strengthen investor protection and build public confidence by adopting a uniform fiduciary standard that is applicable to all practitioners. Click here to read comments and submit your own:  https://www.sec.gov/comments/s7-07-18/s70718.htm.

Lastly, if you are interested in reading the entire proposal, follow this link to the SEC https://www.sec.gov/rules/proposed/2018/34-83062.pdf. You will also be able to review the sample disclosures and the Customer Relationship Summary. 

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