The SEC reset the terms of debate around the fiduciary rule, voting to move ahead with new proposed rules on standards of conduct, additional disclosure and restrictions on advisor/broker titles.

The 4-1 vote comes eight years after Congress authorized the regulator to craft a fiduciary rule, nearly two years after the Department of Labor put forward its own hotly contested fiduciary regulation, and about a year after Jay Clayton became chairman.

"The framework of our proposal is straightforward," Clayton said at Wednesday's meeting. "It reflects a multi-pronged effort to fill the gaps between investor expectations and legal requirements, thereby increasing investor protection, and the quality of advice, while preserving investor access and investor choice, recognizing that access and choice are driven by what is available and how much it costs."

The proposal creates a best interest standard of conduct for brokers with three obligations: disclose to clients material conflicts of interest; an obligation of care that includes exercising reasonable diligence and having a reasonable basis to believe that an investment product is in a client's best interest; and establish and enforce policies and procedures to identify and mitigate or eliminate material conflicts of interest arising from compensation incentives.

The proposal also sets new rules for when financial professionals can hold themselves out as "advisers" or "advisors." Consumer advocates have cited that issue of titles as another area of confusion for investors.

Commissioner Michael Piwowar highlighted this confusion, questioning how such a lengthy document (around 1,000 pages) could achieve the goal of eliminating confusion in the marketplace.

Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018. Clayton unveiled a new approach that will attempt to address legal and regulatory uncertainties that were largely triggered by the Labor Department's rules.
A proposal for a new standard for brokers and advisors "reflects a multi-pronged effort to fill the gaps between investor expectations and legal requirements," SEC Chairman Jay Clayton said. Bloomberg News

In a third item, the SEC is proposing to offer interpretive guidance in an attempt to clarify advisors' responsibilities under their current standard of conduct.

Piwowar and fellow commissioners Robert Jackson Jr. and Hester Peirce all said that they have misgivings about various aspects of the proposals, but voted in support in the hopes that the regulations would be improved over the public comment process.

The commission's proposal falls short of the stringent fiduciary duty that some investor advocates have called for. The proposed standard of conduct calls for brokers to act in their clients' best interests, for instance, but an outline published by the SEC makes no mention of the term fiduciary.

Commissioner Kara Stein, a Democrat and the lone negative vote, blasted the proposed rules in a point-by-point dissent at the meeting.

"Despite the hype, today's proposal fails to provide comprehensive reform or adequately enhance existing rules," Stein said.

The new proposal essentially amounts to a preservation of the existing suitability standard for brokers, with the addition of a few clerical responsibilities governing additional disclosures and tweaks to a firm's policies and procedures, she argued.

"Unfortunately, the proposals before the commission today squander the opportunity for us to act in the best interest of investors," Stein said.

Jay Clayton, chairman of U.S. Securities and Exchange Commission (SEC), center, speaks during an SEC open meeting in Washington, D.C., U.S., on Wednesday, April 18, 2018. Clayton unveiled a new approach that will attempt to address legal and regulatory uncertainties that were largely triggered by the Labor Department's rules
"Despite the hype, today's proposal fails to provide comprehensive reform or adequately enhance existing rules," Commissioner Kara Stein, a Democrat and the lone dissenting vote, said. Bloomberg News

The first item, stipulating that brokers make recommendations in their clients' best interest, is likely to be the subject of contested debate as the industry and advocacy community digest the proposal, the full text of which is likely to be published in the coming days.

"I think the best interest standard is a much weaker standard than what is needed," Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, wrote in an email prior to the vote. "It's a watered down version of the fiduciary duty that governs RIAs. If this is what the SEC wants, it’s clear they are not doing all they can to protect 'Mr. and Mrs. 401(k)' like Jay Clayton promised."

The commission chose its language deliberately. The omission of the term "fiduciary" in favor of a "best interest" standard is an indication that regulators are looking to avoid an overly prescriptive rule that would dramatically disrupt brokers' operations, according to Brendan McGarry, a financial-services attorney with the firm Kaufman Dolowich & Voluck.

"What the SEC doesn't want to do is require broker-dealers to change their business models. But obviously there's the push in the investment industry as a whole to make sure that advisor are operating in the best interests of their customers," McGarry says in an interview.

The SEC is likely seeking to avoid the intense backlash that greeted the Labor Department's fiduciary rule. Business groups, including SIFMA, FSI and the U.S. Chamber of Commerce, sued to block its implementation; a federals appeals court vacated the rule earlier this year and the Labor Department is considering whether to appeal that decision.

Industry insiders point to increased coordination between the SEC and the Labor Department, suggesting that department could follow the commission's lead in tweaking, redrafting or even scrapping its own attempt to regulate the segment of the advisory sector where it has jurisdiction.

The Investment Adviser Association, a trade group representing RIAs, has been advocating for a standard of conduct for brokers that would match the level of care under RIAs' fiduciary standard. That goal is achievable without extending the term "fiduciary" to the brokerage world, but it's also possible that any new standard for brokers will preserve some of the regulatory disparities that currently exist, IAA President Karen Barr said prior to the SEC vote.

"If they don't use the word 'fiduciary,' but the principles and the investor protection are as robust as the fiduciary standard, the name of it doesn't bother me," Barr said. "If it's suitability plus some disclosure without the overarching standard of acting in your clients'' best interest, then it will not be enough."

Barr lauds the move to open that proposal to the notice-and-comment process, rather than issuing the guidance unilaterally, as the commission often does.

Still, she echoes the concern of many advocates for strong fiduciary rules who fear that in the SEC's attempt to harmonize advisor and broker standards, it could actually end up easing the responsibilities that govern the RIA sector. Under the current proposal, that could come through the twin tracks of a rulemaking standard for brokers, and a lenient set of interpretive guidance for advisors.

"We are concerned that by interpretation the standard could be watered down, and the way this is structured it could be that the commission is trying to make the standards consistent, one by way of interpretation and one by way of rulemaking," Barr said. "We are wary of that."