Last Wednesday, June 3, 2015, the Securities Industry and Financial Markets Association (“SIFMA”) announced the industry’s “Proposed Best Interests of the Customer Standard for Broker-Dealers” as an alternative to the concept of “suitability” provided for under the current Financial Industry Regulatory Authority’s (“FINRA”) rules. SIFMA’s proposal is in direct response to the Department of Labor’s (“DOL”) proposed fiduciary duty standard for financial professionals, which, if adopted, could lead to potentially conflicting standards governing qualified versus non-qualified accounts.
SIFMA’s proposal would substitute a “best interests standard” for the word “suitability,” as that term is currently used in FINRA Rule 2111. In relevant part the current rule provides as follows:
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The SIFMA proposed standard would include four “core elements:”
- Articulate a legal and enforceable best interests obligation;
- Consider investment-related fees as part of the best interest standard;
- Avoid and/or manage material conflicts of interest; and
- Provide disclosures about material conflicts and investment-related fees to enhance transparency.
Perhaps of greatest appeal, the SIFMA proposed standard would put FINRA-registered brokers on the same fiduciary playing field as investment advisors registered with states and the SEC, who are already subject to a fiduciary duty standard. SIFMA’s proposal also would address criticism from investor advocates who believe that the current suitability standard is too lax in that it does not, in their view, sufficiently address the potential for conflicts of interest, where a financial professional might, for example, recommend a product that provides higher compensation over a comparable product that pays the professional less compensation.
The DOL proposal has been described by the Obama administration as allowing firms to “set their own compensation practices as long as they acknowledge they are fiduciaries.” However, this arguably creates the potential for confusing, needlessly complex and potentially conflicting standards.
SIFMA’s President and CEO Kenneth E. Bentsen, Jr. touched on some of these concerns about the DOL proposal in his remarks at the SIFMA DOL Fiduciary Seminar: Assessing the Intended and Unintended Consequences. Specifically, Mr. Bentsen expressed SIFMA’s intentions that a best interest standard for broker-dealers should:
- Apply across all investment recommendations made to individual retail customers in all brokerage accounts (not just limited to IRA accounts);
- Serve as a benchmark for, be consistent with, and integrate seamlessly into, the SEC uniform fiduciary standard that ultimately emerges under Dodd-Frank, Section 913;
- Provide interim, strong, substantive, “best interests” protections for retail customers; and
- Follow the traditional securities regulatory approach of establishing a rules-based, heightened standard, including robust disclosure, coupled with robust examination, oversight, and enforcement by the SEC, FINRA and state securities regulators, as well as a private right of action for investors.
SIFMA’s approach could certainly be accomplished through amendments to existing FINRA rules, thus creating synergies with not only the prevailing rule-making framework and structure of that framework, but also ensuring consistency with FINRA and the SEC’s historical approach to protection of investors.
Read the full “Proposed Best Interests of the Customer Standard for Broker-Dealers” at http://www.sifma.org/issues/item.aspx?id=8589954937.