SEC Best Interest v. Fiduciary

• At 2018 NAPA DC Fly-In Forum, Peirce spoke of best interest v. fiduciary duty.
• Standards debated on intent of words and interpretation applied by BD and IA.

Definitions

• Proposed regulation best interestrequires BDs to act in the best interest of the
  retail customer at the time the recommendation is made; identify and disclose
  and mitigate, or eliminate, material conflicts of interest; exercises reasonable
  diligence, care, skill, and prudence, plus reasonable compensation.
• Fiduciary duty involves duty of care and duty of loyalty to offer advice that is
  in the best interest of the client, seek best execution of a client’s transactions.
• Brokers are already subject to a best execution obligation under existing rules.
• Term fiduciary can change over time. DOL did so in 2016 rulemaking.

Main differences

• Fiduciaries have duty to provide advice, monitoring over course of relationship.
• BD, absent formal agreement, not required to monitor retail customer’s account.
• Best interest standard tougher than fiduciary one when it comes to conflicts.
• BDs under standard must not only disclose but mitigate or eliminate conflicts.

Impact

• Trend in BDs becoming IAs to avoid burden, best interest will exacerbate trend.
• Difference in substantive meaning slight, similarities abound, to cause confusion.
• Public understanding of definitions best interest and fiduciaryis they are same.

Simpler Approach

• Not refer to best interest; rather, include suitability, get customer interest first.
• Obligations should be imposed by rule text, not in lengthy rule release language.
• Regime should focus on investor-friendly disclosure to draw in, not repel them.
• Disclosure should encourage investor ask questions on services, products, fees,
  commissions; SEC encourages feedback on nature of items in new form CRS.

Form CRS

• Maybe review disclosures already provided to investors to find information
  that is not material to most investors. And is form CRS sufficient here?
• We might also need the disclosures mandated in regulation best interest.
• Also maybe modify for multi-media approaches, not just paper-based one.