SEC Chair Clarifies Best Interest Standard - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

House Financial Services Committee

SEC Chair Clarifies Best Interest Standard

June 23, 2018
Jay Clayton Securities and Exchange Commission (SEC) Chair
Jay Clayton Securities and Exchange Commission (SEC) Chair

While testifying in front of the House Financial Services Committee, the Chairman of the Securities and Exchange Commission (SEC) attempted to clarify a new rule for best interest standards for broker dealers.

The SEC recently proposed this rule for broker/dealers after the controversial Fiduciary rule was ruled unconstitutional by a federal judge in the spring.

The Fiduciary rule required anyone offering securities advice in retirement to act in a fiduciary manner which is defined as acting in the interest of their client and holding those interests above their own.

Currently, anyone acting as an investment advisor is required to act as a fiduciary for any security transaction, be it in a retirement account or otherwise.

Outside of investment advisors, there are broker/dealers which Investopedia defines as “a person or firm in the business of buying and selling securities for its own account or on behalf of its customers.”

SEC Chair Jay Clayton also explained the difference at the hearing: “The investment advisor model is portfolio based holistic model where you come to me I’m your investment advisor; I’m going to help you build your who portfolio.” Clayton said, “A broker dealer model is, you come to me for a recommendation in a specific area on an episode. Say, ‘Jay, I’d like to get some exposure in telecom and maybe some international stocks.’ I make you a recommendation.”

Clayton explained that with both investment advisors and broker/dealers- which are much more likely to engage in trading activity- the advice must put the clients’ best interests ahead of their own.

“What we are doing in each case, I can’t put my interests ahead of yours.”

Maxie WatersThe proclamation came after Maxie Waters, a Democrat from the State of California, expressed concern that the broker/dealer was not subject to the fiduciary standard.

“In Dodd/Frank, Congress specifically gave the SEC the authority to impose harmonized fiduciary standard for both brokers and investment advisors. The SEC’s proposal does not do that. I’m going to urge Chairman Clayton to provide vital rules which protect investors and savers from unscrupulous actors.” Waters said.

Clayton assuaged Waters concerns noting: “What we are doing, in each case, I can’t put my interests ahead of yours. We are bringing to the broker/dealer space that requirement. We are also bringing to the broker/dealer space care obligation- that in getting to the stocks that I recommend to you, I have to go through a series of steps that insure that they are right for you and your circumstances.”

Based on Clayton’s testimony, there is what former Secretary of Defense Donald Rumsfeld once referred to as “a distinction without a difference.”

Meaning, that in practice, a fiduciary standard and a best interest standard will have little difference in terms of what is required.

“The way that is applied (the fiduciary standard) in the investment advisor space is you can’t put your interests ahead of the customers. That’s what we’re going to do in the broker/dealer space.”

Interestingly, Clayton also said that conflicts occur in any relationship involving securities trading.

“There are no conflict free relationships.” Clayton said.

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