August 2, 2018
While I applaud the SEC's attempt to increase the obligations of registered representatives of broker/dealers to deliver advice in the best interest of their clients, the end result of the proposed rule will cause more confusion amongst retail investors, and will likely result in continued harm to the public.
First, the regulation does not subject broker/dealers to a fiduciary standard, even while using the same language in describing the obligation of a registered representative to work in the best interest of the client. This 'borrowing' of the fiduciary language without subjecting a true fiduciary relationship can only lead to confusion in the consumers' mind regarding whether the relationship is under a fiduciary standard. As a result, a great number of unsuspecting investors will believe they have a fiduciary relationship with their broker representative, when none exists.
Further, hybrid broker/dealer-registered investment advisors will continue to be able to proffer advice under a two hat model, whereby the representative can choose whether to be subjected to a fiduciary or suitability standard, and the client is intentionally left in the dark about whether the advice is subject to fiduciary relationship or not.
Continuing the existing two-hat model can ONLY lead to clients believing advice is subject to the fiduciary standard when, in fact, a portion of the advice is not. Worse, representatives have an obvious incentive to put on their "suitability" hat when their advice is questionable as to whether it is in the best interest of the client. As a result, investors will likely be following riskier advice with greatly reduced legal recourse which is exactly when the investor needs the added protection of a fiduciary standard.
The SEC should use this opportunity to create a regulation far more in line with the obvious congressional intent of the Investment Advisors Act, whereby advice can only be offered under a fiduciary relationship, except when it is truly incidental to the sale of a product. And when advice is offered incidental to the sales relationship, the regulation should require the registered representative to disclose the advice is being made as part of a sales transaction and is not subject to the fiduciary standard. The regulation should further clearly define what constitutes as advice incidental to a sale so that registered representatives are not left to their own discretion in deciding if they wear the suitability hat or the fiduciary hat with their unsuspecting client.