SEC passes new broker rules on investment advice


The US Securities and Exchange Commission has approved new rules regarding the advice American savers receive about their investments, which the agency said would strengthen consumer protection without imposing onerous costs on stockbrokers.

Commissioners on Wednesday voted three to one, with the sole Democrat opposing the changes, to approve a new ” best interest ” standard that will apply to broker-dealers when they recommend products to consumers.

Jay Clayton, chairman of the SEC, said the rule “incorporates fiduciary principles, but is appropriately tailored to the broker-dealer relationship model and will preserve retail investor access and choice”.

The rule, known as “Regulation Best Interest”, or “Reg BI”, requires broker-dealers to disclose material conflicts of interest and take steps to mitigate them. It also bans certain kinds of sales practices where brokers are given incentives to sell specific securities within a limited time period.

It requires firms to act in their clients’ best interest, though the regulation itself does not define what that might be. The approved rule says any assessment of “best interest” will differ for each customer. Broker-dealers are required to comply with the new standards by June 2020.

The vote came almost a decade after Congress in 2010 mandated the SEC to implement new regulations to deal with the issue of stockbrokers profiting by steering clients to investments that earned them expensive fees when cheaper options existed.

Robert Jackson, the Democratic commissioner who voted against the rule, said it failed to properly protect investors and would do little to improve the advice savers received from brokers. “Conflicts will continue to taint the advice American investors receive from brokers,” he said.

Elizabeth Warren, the Democratic senator running for president, said the rule was a “green light” for the investment industry to mislead Americans. “The SEC’s new rules make it easier for Wall Street to cheat families out of their hard-earned life savings,” she said in a statement.

The new requirements are weaker than the regulations formulated by the Department of Labor under the Obama administration. In 2015 the DoL announced a fiduciary standard for firms handling retirement savings, a move that bypassed the SEC after it proved slow to act.

The brokerage industry protested the move and successfully sued to have it struck down. An appeals court last year said responsibility for tackling the issue lay with the SEC and blocked the DoL.

Democrats and consumer advocates have criticised the best-interest standard as too weak, noting that it does not ban conflicts of interest or require stockbrokers to recommend the cheapest products to customers. The changes have been broadly welcomed by the brokerage industry.

On Wednesday SEC staff said the new rule struck the right balance between protecting investors and consumer choice. “Sometimes the more expensive product might be a better match for the customer,” said Brett Redfearn, director of the SEC’s division of trading markets.

The commission also approved rules, again on a 3-1 split, it said would “enhance the quality and transparency” of consumer relationships with investment advisers and broker-dealers.

The rules require firms to give customers a summary of their fees, conflicts of interest and any disciplinary history. The SEC also clarified the distinction between broker-dealers and investment advisers and approved a guidance on the fiduciary duty standard applied to investment advisers.

Mr Jackson said the new guidance weakened the fiduciary standard by stating advisers could not put their interests ahead of clients’, rather than stating that advisers must put client interests first. Mr Clayton rejected the assertion.