Little noticed abroad, controversial new U.S. ‘best interest’ law takes effect today

However, controversy continues over whether the SEC's interpretation of the idea of a "best interest" regulation package is as good as it should be – or might have been. Or even might yet be, one day.

“Reg BI”, as the new SEC regulation is known, and a related set of rules known as Form CRS – unrelated to the global information exchange program known as the Common Reporting Standard – date back to the years of the Obama administration.

That was when legislation known as the "Fiduciary Rule” was signed into law, with the aim of raising the standards of advice provided by U.S. broker-dealers to those of RIAs (Registered Investment Advisers). RIAs are a type of fee-based advice firm that is registered with the SEC, and obliged, since 1940, to act as a “fiduciary” when recommending products, such as investments, to clients.

After years of work on the part of lawmakers in association with industry representatives, the law was set to begin coming into force in 2017. Then Donald Trump was elected president and his administration initially delayed the Fiduciary Rule's full implementation, then in March 2018, finally allowed it to be vacated. 

Opposition from some of the largest companies in the affected sector, which were reluctant to see sales commissions being replaced with flat up-front fees, was seen to have been behind the Trump administration’s decision to seek to do away with the legislation.

(A similar situation occurred a few years earlier in Australia, where that country’s so-called "Best Interests Duty" was initially spiked after a new administration took office and tried to do away with a sweeping package of financial services regulatory reforms known as the Future of Financial Advice (FoFA), on grounds that it would increase their costs of doing business. The Best Interests Duty did prevail there in the end, though, and in 2016, the Australian Securities & Investments Commission took its first action against an Australian business for failing to comply with it.)

In the U.S., both the RIA industry and consumer rights advocates have long questioned why putting a client's interests ahead of those of the person or company selling them insurance or investment products would be anything but the right thing to do.

Nevertheless, until the Obama administration set out to change the regime, and indeed, until today, those selling insurance and retirement products in the U.S. have only been required to meet a lesser "suitability standard". 

Key ruling late Friday 

Although the June 30 date for the implementation of Reg BI was set a little more than year ago, until Friday there was a chance that it might not have gone ahead, or been forced to be suspended, as a result of legal challenges that were brought against it by seven states and the District of Columbia, as well as by a network of fee-only financial planners, the XY Planning Network LLC (XYPN).

In its suit, XYPN had argued that the SEC's Regulation Best Interest rule would give broker-dealers an unfair competitive advantage over advisory firms like those comprising its network.

XYPN and the states also argued that in drafting its Reg BI doctrine, the SEC had ignored a key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which holds that broker-dealers should be held to the same high standards of financial advice delivery as RIAs.

XYPN also argued that Reg BI failed to meet certain conditions set out in the Investment Advisers Act of 1940, which oblige anyone delivering financial advice for compensation to register as an investment adviser, and to be held to the so-called "fiduciary standard".

(Under Reg BI, neither brokers nor dual registrants who market and deliver financial planning services are required to register as an investment adviser.)

Late Friday afternoon, however, the U.S. Court of Appeals for the 2nd Circuit ruled that the SEC's regulation could go ahead, on the grounds that the seven states and District of Columbia didn't have standing to bring their petition, on grounds of competitive disadvantage, and that, while XYPN might not have "preferred" the SEC's Regulation Best Interest program, it was chosen by the SEC "after a reasoned and lawful rulemaking process". 

Not to be outdone, late yesterday the Department of Labor unveiled a new best interests regulation of its own, which it said was "based on an existing temporary policy adopted after the 5th Circuit Court of Appeals vacated" its Obama-era, 2016 Fiduciary Rule package. 

In a statement, the DOL said it was proposing a new "exemption" that would offer "a new prohibited transaction class exemption for investment advice fiduciaries" that would "allow investment advice fiduciaries to give more choices for retirement using 'Impartial Conduct Standards'", which it defined as "a best interest standard; a reasonable compensation standard; and a requirement to make no materially misleading statements".

The statement went on: "The standards in the [DOL's] proposed exemption announced today align with standards of other regulators, including the SEC.

"Together, the actions of the SEC and the Department of Labor will strengthen retirement security for Americans."

Consumer Federation of America:
'Weak, industry-friendly standard'

Meanwhile, also yesterday, hours before the SEC's Reg BI was scheduled to take effect – the Consumer Federation of America (CFA) issued a highly-critical assessment of the SEC's new regulatory regime, which it noted was expected to be joined imminently by a Department of Labor initiative aimed at retirement product sellers.

"As implementation moves forward on Reg BI, [the] Department of Labor is expected to extend this weak, industry-friendly standard to retirement accounts," the CFA's statement began, noting that the DoL's contribution would "[deprive] workers and retirees of vital protections against conflicted retirement investment advice". 

"Reg. BI combines a vague and undefined ‘best interest’ standard with minimal restrictions on incentives that encourage and reward harmful advice. It’s a toxic combination,” the CFA quoted its director of investor protection, Barbara Roper, as saying.

“Investors and retirement savers deserve real protections, not this sham, which was drafted to preserve industry profits, not protect investors.”

SEC-regulated expat advisers foresee no changes 

SEC-regulated wealth managers in Expatland, meanwhile, say that they don't foresee having to make changes in the way they do business as a result of the SEC's new Reg BI, as they have been operating to a fiduciary standard all along. 

Brian Dunhill, founder and head of Dunhill Financial, for example, said the SEC's new Regulation Best Interest "would "not change anything for my firm, or many of the [other] U.S. expat firms, as we are registered as RIAs and not as brokerage houses."

He added that Dunhill Financial, like "nearly half of the financial advisers in the U.S.," had always chosen this approach "intentionally, so as to be registered as fiduciaries", which he says is what clients both inside the U.S. and elsewhere have said that they prefer.