6 Things to Know About the SEC’s Proposed Advice Rule

Estimated reading time: 2 minutes, 2 seconds

Advice RuleLast week, the Securities and Exchange Commission (SEC) released a proposed rule to establish new investment advice standards. The goals of the proposed rule are to raise and clarify standards of conduct for brokers-dealers (B-Ds) and advisors and provide clarity regarding fees, conflicts of interest and so on. The proposal will have a 90-day comment period.

Here are six things to know about the new advice rule:

  1. The two-tiered approach to investment-advice standards would be preserved. The new advice rule wouldn’t create a uniform fiduciary standard for brokers and advisors. The reason for no uniform standard is due to “their different relationship types and models for providing advice.”
  2. Advisors may see “potential enhancements to their legal obligations” according to the proposal. The SEC will consider areas in the broker-dealer framework that provide investor protection and determine whether counterparts exist in the advisor context.
  3. With that said, B-Ds would be held to a “best interest” standard for retail business. This is different from the current suitability standard for brokers. And it’s important to note that the SEC doesn’t refer to it as a “fiduciary standard” in its proposal. The SEC believes this “best interest” standard will be less costly for retail clients and brokers and have added benefits. The goal is to prohibit B-Ds from putting their interests ahead of client interests.
  4. The proposal restricts B-Ds and brokers from using the terms “adviser” or “advisor” (in whole or in part of other titles) in certain communications with a retail client. However, this wouldn’t apply to those acting on behalf of a bank, insurance company, municipal advisor or commodity trading advisor.
  5. Advisors and brokers would be required to provide clients with a document (in four pages or less) summarizing their relationship. This document must be provided in addition to existing reporting and disclosure requirements.
  6. The standard is not intended to create a new private right of action, established by the best-interest contract exemption in the Department of Labor (DOL) Fiduciary Rule.

The Fiduciary Rule is currently undergoing a review at the request of President Trump. Also, the DOL has until April 30 to decide whether to appeal a blow dealt to the Rule last month by the Fifth Circuit Court of Appeals.

So, while we wait to see how the Fiduciary Rule turns out, the investment industry now has this Advice Rule to pour over.

For more information on the SEC’s proposal, visit any of the below:

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