The U.S. Securities and Exchange Commission is expected on Wednesday to approve controversial legislation that is meant to set higher standards for “broker/dealers” – those selling retirement products, insurance and investment products to American consumers – as a years-long campaign by consumer advocates to boost advisory standards is formally acknowledged by the American securities regulator.
However, the SEC's rule is seen as falling short of what some consumer advocacy groups had been calling for – leading some observers to say that the debate over how best to extend an existing “best interest” requirement currently governing the way U.S. Registered Investment Advisers, or RIAs, look after their clients to the broker/dealer sector is likely to rage on.
The debate is being watched with some interest by those advisers and product-purveyors who look after Americans resident overseas, many of which are SEC-regulated.
Technically speaking, U.S. expat-focused firms that are not advising on U.S.-based investments, or providing advice to U.S.-resident individuals, do not require – and for this reason often do not have – SEC-regulated status, and thus will not be directly affected by what happens in Washington on Wednesday.
Many American expat-focused firms are SEC-regulated, though, and often already meet the “best interest” standard, sometimes referred to as the “fiduciary standard," and thus will not have to change the way they do business as a result of Wednesday's vote.
Being bound to comply with the SEC’s Regulation Best Interest could, though, end up being an advantage that those expat-focused firms that do have SEC-regulated status may choose to highlight to their would-be clients more than they have done in the past, as the "best interest" issue becomes more mainstream, one observer told the American Expat Financial News Journal.
And the new regulation is something that offshore advisers could need to be aware of whenever they find themselves dealing with a client who is returning to live in the States, or who has U.S.-based investment products that could fall under its scope.
In the meantime, reports out of the U.S. say that consumer advocates there claim that the SEC’s new Regulation Best Interest doesn’t go nearly far enough.
"The SEC has left itself vulnerable to legal challenges" in its drafting of the legislation, Barbara Roper, the Consumer Federation of America's director of investor protection, was quoted by the Financial Times as saying, in an article in today's paper entitled "Broker rule infuriates consumer advocates."
"All this is being done in the name of investor protection, [but] it is a fraud on the investing public," Roper added, according to the publication.
A CFA spokesperson added: "Our concern is not simply that this is not called a 'fiduciary standard', but that it doesn’t actually require brokers to recommend the investments that are best for their customers, or prevent them from promoting their own interests at their customers’ expense.
"As a result, it is going to mislead investors into expecting protections it doesn’t deliver.
"Meanwhile, instead of strengthening the standards that apply to brokers, the [SEC] is poised to adopt an appallingly weak interpretation of the Investment Advisers Act fiduciary duty, which sends the message that outright fraud is the only thing investment advisers can’t disclose away."
The Investment Adviser Act was the 1940 legislation that established the framework under which U.S. RIAs carry out their work on behalf of their clients, and includes the so-called fiduciary duty that U.S. RIAs have been obliged to adhere to for the past 79 years.
On Wednesday, in addition to deciding whether to adopt the SEC's so-called Regulation Best Interest, or "standard of conduct for broker-dealers," the SEC members will also vote on a final client relationship disclosure document known as Form CRS, and what it calls "a Commission interpretation of the standard of conduct for investment advisers."
Information about the voting process may be found on the SEC’s website, by clicking here.
‘Enhanced fiduciary standard’
One expat-specialist wealth manager that doesn't expect to be significantly affected by the SEC’s new ruling, assuming it does come into force, is London-based MASECO Private Wealth, which has been looking after American expats in the UK and elsewhere since 2008.
According to Andrea Solana, head of advanced planning at MASECO, the firm “is an RIA under SEC rules, and therefore has been operating under an enhanced fiduciary standard since it began.”
Solana adds that the steady raising of the regulatory standards bar for advisers across the EU, in the form of the EU’s MiFID (Markets in Financial Instruments Directive) and its successor legislation, MiFID II, will have “paved the way for increased transparency requirements for those advisers [of American expats] who are based in Europe, so the level of impact” of the SEC’s new Regulation Best Interest legislation “may very well be less than it will be for some other, U.S.- based broker-dealers” as well as those based outside of the EU.
Brian Dunhill, founder and head of Brussels-based Dunhill Financial, said the SEC's new Regulation Best Interest also "wouldn't 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.," has 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 want.
That the U.S. hasn't fully enshrined the fiduciary duty in law yet, Dunhill notes, is a measure of the fact that it "is a little behind the curve in comparison to countries like Australia, where every financial adviser [now] has to act in the best interest of their clients.
"This move is really being driven by the demand of the clients, as it should be, and therefore the advisers are doing business along these channels instead of [in the mode of] the old broker-dealers," Dunhill added.
Until the Trump administration move against the Department of Labor’s so-called “fiduciary rule” or “standard”, in late 2016/early 2017, few Americans outside of financial circles were familiar with the term “fiduciary,” or the idea of a “best interest” requirement.
In the U.S., RIAs have had to comply with a fiduciary rule that’s been in place since 1940, but broker-dealers were not covered by it.
This meant, say critics, that they were able to recommend products that might not have been the best products available for their clients, but which, owing to their large commissions, were in the broker's best interests.
According to press reports, efforts to introduce a fiduciary rule through the U.S. Labor Department began as far back as 2010, although the bill wasn't formally introduced until 2015. These efforts in the U.S. coincided with similar campaigns in other countries, notably Australia, which in 2013 adopted a "Best Interests Duty" as part of a package of regulatory changes aimed at boosting financial advice standards there, known as the Future of Financial Advice regulations.
But it was only after the Trump administration derailed the DoL’s fiduciary rule in stages through 2017 and 2018 that the issue began to spill over from the business pages of American newspapers onto the consumer finance pages, as journalists and American consumers alike had became increasingly aware of the debate. As this occurred, pressure on lawmakers and regulators like the SEC to do do something, or to appear to be doing something, grew.
Wrote the New York Times's Editorial Board on May 26, 2017, in a piece entitled "Retirement Investors Aren't Safe Yet," as the debate about whether or not the DoL's fiduciary rule would survive efforts to kill it off: "While some financial advisers must adhere to a legal duty to act in a client's best interest, many others face no such obligation. One result is that consumers pay an estimated US$17bn a year in excessive fees, because adviser steer them into high-cost products, when lower-cost ones are available...
"The fiduciary rule, as written, will help working people. Rescinding it will not."
Thus it was that once the DoL's fiduciary rule was officially history, and even as Washington lawmakers and SEC officials debated about what further, if anything, needed to be done, lawmakers and regulators in a number of states began to take matters into their own hands, and started drafting their own state-wide fiduciary standards. Among the states reported to have begun drafting such rules have been Nevada, Connecticut, New York, Maryland, New Jersey and Illinois.
It is not known whether these state efforts will continue once the SEC's Regulation Best Interest is approved, assuming it is.
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