Investor Protections (Page 124 to Page 125 of the Comprehensive Summary[1] to the Bill[2])

Title IX also included numerous provisions touted as enhancing investor protections. Yet if implemented in their current form, these provisions would in fact limit investor access and choice and increase investor costs. The Financial CHOICE Act will amend and eliminate provisions that restrict financial opportunity and investment options for hardworking Americans. Most notably, the legislation will amend Section 913, which authorized, but did not require, the SEC to establish a uniform standard of care for broker-dealers and investment advisers, and also required the SEC to study and issue a report on the issue.

The SEC’s study, released in 2011, recommended the imposition of a uniform fiduciary standard for broker-dealers and investment advisers[3]. As then-SEC Commissioners Kathy Casey and Troy Paredes pointed out at the time, the study declined to identify whether investors were being harmed or disadvantaged under one standard of care compared to the other, and therefore lacked a basis for concluding that a uniform standard would improve investor protection. Commissioners Casey and Paredes also questioned the costs that new standards of care would impose on market participants and investors, and noted that the SEC staff study did not account for the potential overall cost of the recommended changes to broker-dealers, investment advisers, and retail investors[4].

While the Department of Labor recently finalized its rules to amend the definition of “investment advice” to expand the class of financial professionals subject to fiduciary duties covered by the Employee Retirement Income Security Act of 1974 (ERISA)[5], the SEC is the agency that Congress designated to oversee and regulate the conduct of persons providing investment advice and effecting securities transactions in the United States. If changes are necessary to the delivery of financial advice, the capital markets regulatory authorities should undertake the action necessary to address any perceived inadequacies to protect investors with smaller account balances, including workers saving for retirement. But it should be done only after rigorous analysis on the need for the rule, its impact on investor access to financial advice, and the costs and benefits to investors.

The Financial CHOICE Act repeals the DOL’s fiduciary rule and requires the SEC, before promulgating any such rule, to report to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs on whether (i) retail customers are being harmed because broker-dealers are held to a different standard of conduct from that of investment advisers; (ii) alternative remedies will reduce any confusion and harm to retail investors due to the different standard of conduct; (iii) adoption of a uniform fiduciary standard would adversely impact the commissions of broker-dealers or the availability of certain financial products and transactions; and (iv) the adoption of a uniform fiduciary standard would adversely impact retail investors’ access to personalized and cost-effective investment advice or recommendations about securities. Additionally, the SEC’s chief economist is required to support any conclusion in the report with economic analysis[6]. Finally, it requires the DOL, if it promulgates a fiduciary rule under ERISA, to substantially conform it to the SEC’s standards.


[1]  https://financialservices.house.gov/uploadedfiles/2017-04-24_financial_choice_act_of_2017_comprehensive_summary_final.pdf 

[2] https://financialservices.house.gov/uploadedfiles/hr_10_the_financial_choice_act.pdf

[3] SEC, STUDY ON INVESTMENT ADVISERS AND BROKER-DEALERS, (2011), available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf.

[4] Commissioners Kathleen L. Casey & Troy A. Paredes, Statement Regarding Study On Investment Advisers And Broker-Dealers (Jan. 21, 2011), available at https://www.sec.gov/news/speech/2011/spch012211klctap.htm.

[5] Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128, 82 Fed. Reg. 12319 (Mar. 2, 2017), available at https://www.federalregister.gov/documents/2017/03/02/2017-04096/definitionof-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice-best.

[6] These provisions are drawn from legislation authored by Rep. Ann Wagner (H.R. 1090), which passed the House on October 27, 2015.