The proposals are designed to enhance the quality and transparency of investors’ relationships with broker-dealers and RIAs, which are currently subject to different standards of care governing their recommendations to clients. The proposals also seek to preserve access to a variety of types of advice relationships and investment products. 

What’s in the SEC proposal?

The SEC issued a three-part package of proposed rules and interpretative guidance on the standards of conduct for broker-dealers and investment advisors when providing recommendations and investment advice to individual investors.

The package includes:

  • Regulation Best Interest, which would require broker-dealers to act in the best interest of an individual investor when making a recommendation and put the interests of the client ahead of their own. This standard would apply to recommendations of any securities transaction or investment strategy involving securities to individual investors, including recommendations to transfer or roll over assets from one account type to another.
  • An interpretation of an investment advisor’s existing federal fiduciary obligations. The SEC’s proposed interpretation seeks to provide guidance about an advisor’s obligations under the duties of loyalty and care.
  • A new “client relationship summary” disclosure document (called Form CRS) to help investors understand their relationship with an investment professional.The new short-form disclosure document would be distributed by broker-dealers and investment advisors.

Vanguard’s view

Vanguard believes regulation should require all types of investment professionals and firms to:

  • Provide recommendations in their clients’ best interest, placing the interests of the individual investor ahead of the interests of the professional or firm.
  • Provide recommendations to individual investors with care, skill, and prudence.
  • Provide clear and complete disclosure of the nature of the relationship and services, all direct and indirect compensation and remuneration they receive, and any material conflicts of interest.
  • Maintain policies and procedures to eliminate, mitigate, and/or disclose any material conflicts of interest.

Individual investors deserve investment recommendations held to a harmonized standard of care, regardless of the type of account they hold or institution they choose for advice. An individual investor’s financial wellness and security depends on the quality of the advice and investment recommendations received. By imposing a best-interest standard governing investment recommendations by broker-dealers, the SEC’s proposal meets Vanguard’s criteria for advancing the cause of investor protection. 

Potential areas of improvement

Although Vanguard supports the overall effort, the proposals could be strengthened in several areas, including the following:

Going beyond costs. Vanguard believes individual investors deserve investment recommendations that are in their best interest; that is why for decades it has offered clients advice using low-cost, high-quality investment products.

The SEC’s proposed standards require careful consideration of the costs of a product to an individual investor and the potential remuneration to be received by the investment professional or the firm. But Vanguard believes that the proposals should address additional factors, including product structure, liquidity, volatility, issuer reputation, brand, and practices such as securities lending activities, portfolio tracking error, and the use of derivatives.

Conflicts of interest. The Form CRS proposal requires conflict-of-interest disclosures to be summarized only at a high level. Investors would be best served if there was greater transparency on all the types and ranges of costs, commissions, fees, expenses, trailing commissions, loads, revenue sharing, and other forms of remuneration involved with an investment recommendation before it is implemented.

Licensing standards and other requirements. Vanguard does not support imposing federal advisory licensing standards. States already administer a comprehensive licensing and registration system for investment adviser representatives. Before imposing a federal continuing education requirement for advisors, the SEC should work with state regulators through the North American Securities Administrators Association, which is currently considering a state continuing education requirement.

Vanguard also does not see the need to impose broker-dealer-like financial responsibility requirements on investment advisors. Because investment advisors are not permitted to carry client accounts or control client funds and securities, rules such as the net capital and customer protection requirements do not fit the advisory business model.

The comment period for the SEC proposal expires this week, and it will take time before final rules go into effect. Vanguard will remain vigilant in its support of investor interests and will continue to work with the SEC to strengthen this proposal as it works its way through the regulatory process.