SEC dealer-conduct proposal is on MSRB's radar
WASHINGTON — A Securities and Exchange Commission proposal to impose new standards on dealers making recommendations to retail customers has been placed on the agenda at the Municipal Securities Rulemaking Board's next meeting.
The proposal unveiled Wednesday, known as Regulation Best Interest, is among the items up for discussion at the board meeting next week. It would require a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.
It was released as part of a package of proposals that also include an explicit codification of a long-standing interpretation that investment advisers owe their clients a fiduciary duty and a new disclosure form for both dealers and investment advisers to make clear to their retail customers the scope and nature of their relationship.
Under common law, investment advisors have a fiduciary responsibility to put the interests of their clients ahead of their own, but the SEC’s proposal for broker-dealers stops short of that. Instead, Reg Best Interest would require broker-dealers to disclose potential conflicts of interest to their retail customers, exercise “reasonable diligence, care, skill, and prudence” in their recommendations, and have in place written policies and procedures aimed at identifying and minimizing conflicts of interest.
MSRB rules already impose on municipal securities dealers responsibilities to determine that a recommendation or transaction is suitable for a customer and to attempt to execute transactions at prices as favorable to the customer as possible under prevailing market conditions. The SEC proposals come after a battle over a Department of Labor rule that sought to place a fiduciary duty on all financial professionals involved in the management or advising of retirement accounts. A federal appeals court struck the rule down, putting the ball in the SEC’s court, where industry groups had maintained it belonged.
“The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct,” said SEC Chairman Jay Clayton. “The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors.”
While the SEC determined to open a 90-day comment period on Reg Best Interest and the other proposals, support from the commission’s two Democrats was lukewarm to hostile. Commissioner Robert Jackson said he would support opening comment on Reg Best Interest, but would not vote for it if the existing proposal were the final product. Commissioner Kara Stein blasted the proposal, saying it amounted to little more than a safe harbor for dealers who comply with existing suitability rules.
“Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries?” she asked. “No. Does this proposal require financial professionals to provide retail customers with the best available options? No.”
Muni market groups said they would weigh in on the proposal. Kelli McMorrow, senior vice president of federal legislative and regulatory policy at the Bond Dealers of America, said she believed the SEC’s conduct standard approach made more sense than a broad fiduciary duty standard, and added that the SEC had been engaged and transparent throughout its development of the proposal.
The MSRB listed the proposal as the final item on its discussion agenda for the April 25-26 board meeting. If Reg Best Interest were to be approved by the SEC, it would have implications for MSRB rules.
“The MSRB has been actively following discussions around investment professionals’ standards of conduct,” said MSRB President Lynnette Kelly. “We are carefully reviewing the SEC’s recent detailed proposal and plan to begin discussing it at our board meeting next week.”
The MSRB also plans to discuss its ongoing compliance support efforts, primary market practices, coordination with enforcement agencies, implementation of its soon-to-be-effective markup disclosure requirements, and underwriter duties to issuers, among other topics.