Author
Partner, Disputes, Toronto
While in Canada division continues over the issue of “best interest” in the financial advisory industry, the U.S. national securities regulator confirmed that it is considering its own position on the issue. After many years of post melt-down hand-wringing, the question of whether American financial advisors will become subject to a common and consistently enforced standard of care remains unanswered.
A focal issue discussed at the Securities Industries and Financial Markets Association (“SIFMA”) Compliance & Legal Annual Seminar in March was the introduction of a national uniform best interest standard for brokers, which applies across the industry. The Chairman of the U.S. Securities and Exchange Commission (“SEC”), Jay Clayton, and other regulators stated that the development of such a rule was a priority. Chairman Clayton confirmed that the SEC is forging ahead with the process of drafting the rule, which the industry can expect “soon”. Anticipation for the SEC’s rule was heightened following a recent U.S. Court of Appeals Decision which overturned the fiduciary standard rule introduced by the Department of Labor (“DoL”) in 2016.
U.S. appeals decision overturns DoL’s fiduciary standard
On March 15, 2018, the United States Court of Appeals for the Fifth Circuit released a decision striking down the DoL’s fiduciary standard rule, which required that advisors for certain clients and for certain investments (i.e. relating to retirement) act in the best interests of their clients and put their interests above their own. The U.S. Court of Appeals ruled that the DoL’s exceeded its regulatory authority in introducing its fiduciary rule standard. The Court based its decision in large part on arguments made by SIFMA, the U.S. Chamber of Commerce and other regulators, including that the fiduciary rule was too onerous and could make the provision of retirement advice too costly.
The SEC forging ahead with its rule
There was wide agreement amongst panelists at the SIFMA C&L Seminar that the recent U.S. appeals decision provides more freedom for the SEC to create its own rule that would apply broadly to the broker-dealer industry (rather than the SEC needing to harmonize its rule with the DoL’s vacated standard for retirement accounts). Chairman Clayton stated at the SIFMA conference that the recent court decision would have little effect on how the SEC approaches its new rule, which is intended to be a simple standard that provides clarity on the regulation of the broker-dealer relationship. Other commentators have suggested the case is bound to impact how the SEC’s rule is drafted.
Canada’s regulatory focus
As we discussed in a previous post, Canadian regulators have also increasingly been focused on managing conflicts of interest in the financial industry, a crucial aspect of financial advisors’ duty owed to its clients. A number of regulatory initiatives aimed at managing conflicts of interest in the financial industry have been introduced or canvassed for comment by numerous market over-seers, including guidance from the Canadian Securities Administrators, the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization relating to compensation-related conflicts. These regulatory initiatives are taking place in parallel to the ongoing review of sales practices in the financial industry by the Financial Consumer Agency of Canada (FCAC) and the Office of the Superintendent of Financial Institutions (OSFI). In its draft 2018-19 statement of priorities (which will be discussed in a future post), the Ontario Securities Commission has expressed its intention to go it alone “on best interest” if necessary.
Compliance officers, legal advisors and responsible executives in the financial industry need to be vigilant that they have effective processes in place to ensure that there is enterprise-wide identification monitoring and management of potential conflicts of interest and regulatory requirements. This has become particularly crucial in light of the increased regulatory scrutiny on these issues.
