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SEC says securities brokers must act in clients’ interest. Is it an improvement?

Senate Appropriations Committee Holds CFTC And SEC Budget Hearing
Jay Clayton, chairman of the Securities and Exchange Commission, said new rules will “enhance the quality and transparency” of services that financial firms provide clients, particularly when it comes to disclosing conflicts.
(Mark Wilson / Getty Images)
Bloomberg

Wall Street’s main overseer approved new conflict-of-interest rules for brokers, a sweeping regulatory overhaul that has drawn criticism from investor advocates for being too lax.

The measures, approved by a divided U.S. Securities and Exchange Commission Wednesday, require brokers to act in the “best interest” of clients. What that actually means, however, remains in dispute and critics — including the SEC’s own in-house investor advocate — said the measures could weaken existing standards for investment advisors, who have a slightly different business model than brokers.

SEC Chairman Jay Clayton said at a public meeting Wednesday that the agency’s action will “enhance the quality and transparency” of services that financial firms provide clients, particularly when it comes to disclosing conflicts.

He added that the rules, which are similar to a version that the SEC first proposed in April 2018, clears up confusion customers have regarding the different codes of conduct that apply to brokers and investment advisers. Clayton also disputed criticisms that the plan fails to enhance investor protections.

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Republican Commissioners Hester Peirce and Elad Roisman joined Clayton in supporting the measures, which haven’t been publicly released. Robert Jackson, the lone commissioner in a Democratic seat, dissented.

The regulations — which will affect tens of millions of investors who buy stocks and bonds to save for college, retirement and new homes — have won widespread backing from financial firms.

Brokers will “finally have a rule that says you can’t put the firm’s interest ahead of the client,” said Christopher Iacovella, who represents regional brokerages as chief executive officer of the American Securities Assn. Wall Street’s main trade group has also lauded the effort.

If a securities professional recommends his client purchase a stock, he is giving investment advice ... [and] he should have a fiduciary duty to his client.
John Britt, retired SEC enforcement attorney

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But support from the industry has only heightened concern among opponents that the SEC measures are a giveaway to bankers that will confuse investors. Securities firms successfully sued to overturn Obama-era rules that were more stringent.

Some industry critics are already contemplating a legal challenge and have been mobilizing a public relations campaign against the SEC.

The clash took center stage at the SEC’s Washington headquarters on Wednesday. Jackson argued the rules don’t force “Wall Street to put investor interests first.”

AARP, the 38 million member lobbying organization that represents the interests of older Americans, demonstrated its opposition by sending representatives to the SEC meeting dressed in the group’s signature red.

AARP members wanted “to show the faces of real people who will be impacted by the failure of the SEC to put investors’ interests first,” David Certner, the group’s legislative policy director, said in an emailed statement.

In a statement, the SEC said its regulations require firms to clamp down on conflicts that could encourage firms to put their interests ahead of their clients, such as contests that reward brokers for selling more securities than peers. The rule also prohibits brokers from exclusively selling their employers’ products. The regulator clarified that brokers have to comply with the rules when they transfer customers to an Individual Retirement Account from another retirement account.

Before Wednesday’s vote, the rules’ critics had been particularly worried that they would go beyond setting standards for brokers and end up weakening the long-standing fiduciary obligation for investment advisors. Consumer advocates have long argued that both should be held to the same strict obligation.

Rick Fleming, the SEC’s investor advocate, reiterated those concerns Wednesday. In a statement, he said the regulator’s plan “weakens the existing fiduciary standard by suggesting the liability for nearly all conflicts can be avoided through disclosure.”

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Fleming added that the new broker requirements are “a step in the right direction,” but they were undermined by the SEC’s revised interpretation of the fiduciary obligation for investment advisors.

Clayton dismissed such criticisms, saying the rules don’t at all soften existing standards for money managers.

John Britt, a retired SEC enforcement attorney who is writing a book on investor protection, called the plan a “fake regulation’’ that does more to help brokers than their customers.

“If a securities professional recommends that his client purchase a particular stock, he is giving investment advice,’’ Britt said. “And if he’s giving investment advice, he should have a fiduciary duty to his client — nothing less.’’


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