Displaying items by tag: SEC
It honestly seems like it would have happened sooner given all the uproar over how “lenient” the new SEC best interest rule supposedly is. Nonetheless, now it has: the SEC has just had a suit filed against it by no less than seven states and the District of Columbia as part of an effort to block the rule. It is the first lawsuit filed against the new regulation and came from a group that included, California, Delaware, New Mexico, Oregon, Connecticut, Maine, and New York. The plaintiffs argue that the rule "undermines critical consumer protections for retail investors". One top lawyer in the space said “The day the release came out [about Reg BI], we figured the SEC would get sued, and here we are”.
FINSUM: Not much of a surprise here really, except maybe that the suit is coming from a pretty formidable group (and not just some random trade body). Get ready for a long period of legal limbo.
Anyone who has been following the DOL/SEC-fiduciary rule/best interest saga is probably sick of the word “harmonization”. The term is a catch-all for the idea that the two agencies will synchronize their rule-making so there won’t be any grey area or uncertainty for advisors. We doubt that will happen (or even can, given the law of unintended consequences). Yet, a top industry law firm has just weighed on the specific points where harmonization may happen. The first big area to consider is rollovers, as both agencies have in the past claimed it as their own territory. That will likely be an area where harmonization is necessary because of previous guidance issued by both. Electronic disclosures will be another priority area. Additionally, the rules governing defined benefit versus defined contribution plans will also need to be harmonized.
FINSUM: We are slightly doubtful their will be some great harmonization between the DOL and the SEC. So, expect some uncertainty, grey areas, and more business for lawyers.
Rollovers are one of the most important and hotly contested areas of forthcoming regulation. The mostly defunct DOL rule stated that advisors need to act in the best interest of clients when dealing with rollovers only if the firm was a fiduciary. However, the big forthcoming change is that the SEC Best Interest rule essentially states that advisors AND brokers need to act in the best interest of clients all the time, but allows that disclosure of material conflicts can be sufficient to overcome any hurdles. According to Drinker Biddle & Reath, a leading wealth management law firm, “Reg BI standard of care obligation requires that a broker-dealer have a reasonable basis to believe that taking the assets out of the plan and rolling them over to an IRA is in the best interest of the participant at the time of the recommendation”.
FINSUM: So the DOL rule was very strict but fairly narrow in application, while the SEC rule is broader (encompassing brokers and fiduciaries) but less strict.
In what comes as a surprise, the new iteration of the DOL rule may in fact be multiple rules bundled into a package. A lawyer from well-respected industry law firm Drinker Biddle & Reath says they have credible rumors that there will be multiple new rules, and that they will be friendly for those in the industry. The firm says that the new rules will likely be based on the old 1975 five-part test, and that the Best Interest Contract Exemption will be replaced. The new DOL package is also supposed to harmonize well with the SEC’s new Best Interest rule, which was approved in June.
FINSUM: It is good news that this rule is supposed to be more friendly to those in the industry, but it is worrying that there may be multiple rules. The more components there are to the rule, the more likely it will be that it is unclear.
Is it a huge deal or not? No one seems to be able to decide. The issue at hand is that the new SEC Best Interest rule explicitly requires brokers to consider costs when recommending products to clients. That is potentially a very big change. However, some say brokers have already been doing this as part of suitability rules, so it may not change practices much. It is important to note that brokers do not need to recommend the cheapest product to clients, but they must take cost into consideration.
FINSUM: Considered in a vacuum, taking cost into consideration has long been a no-brainer. The bigger question is how the SEC decides to enforce this standard. Hindsight will always be 20-20 in an investigation and this could be a big disadvantage to brokers.