Stockbrokers would face tighter restraints on
conflicts that can bias investment advice to customers, under a rule proposed
Wednesday by the Securities and Exchange Commission.
The SEC’s plan to require brokers act in the
best interest of clients is less restrictive than the Labor Department’s
“fiduciary rule” affecting retirement accounts that was completed during the
last days of the Obama administration, and will likely spark complaints from
congressional Democrats and consumer groups that it is too permissive. The
SEC’s rule wouldn’t ban any single conflict of interest, such as sales contests
that brokers conduct to juice sales of particular products, but would generally
require brokers to disclose conflicts of interest and try to blunt their
The SEC’s rule, approved Wednesday by a
4-to-1 vote and sharply criticized by the agency’s Democratic members, could eventually replace the fiduciary rule. A federal
appeals court last month overturned the Labor Department regulation after
a lawsuit by Wall Street trade groups.
The SEC proposal “reflects a multipronged
effort to fill the gaps between investor expectations and legal requirements,
increasing investor protection and the quality of advice while preserving
investor access and investor choice,” SEC Chairman Jay Clayton said.
The proposal will now be subject to 90 days
of public comment. The SEC will need to vote to finalize the rule after
studying those comments.
Wall Street hopes the SEC’s proposal provides
it flexibility to continue selling some higher-fee products and serving smaller
investors by charging them commissions. The Labor Department’s rule made it
harder for brokers to charge commissions and sell some higher-fee investments,
which the industry said reduced choices for investors.
Under the SEC’s proposal, brokers would
generally be required to disclose conflicts of interest to clients such as
bonuses they get for selling certain products or fees they earn for steering
investors toward certain mutual funds or insurance products. Brokers also would
have to either blunt the impact of the worst conflicts or eliminate them
Certain incentives such as sales contests, or
prizes brokers get for selling certain investments, would probably be untenable
under the rule, according to people familiar with the SEC’s thinking.
The Obama administration said conflicts of
interest cost retirement investors $17 billion a year, a figure the securities
The SEC plan also requires brokers to apply
special scrutiny when they recommend a series of trades that would generate
more income for the firm. The measure is intended to make it harder for brokers
to “churn” accounts, or make nonsense trades that simply generate commissions
for the broker.
SEC Commissioner Kara Stein, the lone vote
against the plan, blasted the proposal as a failure to upgrade current
requirements on brokers to provide advice that is suitable to clients. Ms.
Stein, a Democrat, said the SEC didn’t even define what “best interest” means,
giving brokers room to rely on arcane disclosures and policies to escape
liability. Her rebuke of the plan will signal to congressional Democrats that
they should oppose the measure and aggressively question Mr. Clayton about it.
“Despite the hype, today’s proposals fail to
provide comprehensive reform or adequately enhance existing rules,” Ms. Stein
said. “Perhaps it would have been more accurate to call it ‘Regulation Status
Other commissioners, despite voting for the
plan, criticized elements of what the SEC put forward on Wednesday. That could
make it harder to finalize a rule in the coming months, since commissioners are
less willing to support final rules they believe are flawed. Republican
Commissioner Michael Piwowar said the proposal could more clearly explain what
brokers have to do to show their advice was in the “best interest” of
“This lack of clarity is worrisome and could
undermine our goal of preserving retail investors’ ability to access different
types of financial services,” Mr. Piwowar said.
The SEC proposal also doesn’t create a new
basis for investors to sue their brokers for violating the best-interest
standard. That means investor complaints will still be decided in arbitration
hearings organized by the Financial Industry Regulatory Authority, an
industry-funded regulator. Wall Street revolted against Labor’s rule because it
created a way for clients to sue brokers in class-action lawsuits.
The distinction between brokers and
investment advisers has long confused many retail clients. While brokers earn
sales commissions, advisers are paid a fee that is set as a fixed percentage of
a client’s assets. Advisers’ payment model is supposed to free them from
pushing particular products and instead focus on managing a well-performing
The SEC’s proposal would require brokers and
advisers to produce a short brochure that explains the different legal duties
and the fees they may charge. Separately, the SEC proposed barring brokers from using titles, such as “financial
adviser,” that blur the line between their business model and the fiduciary
duty that binds investment advisers.
Mark Flannery, a former SEC chief economist,
said the new disclosure might be helpful to some investors, but for others it
will be too generic to give them any bargaining power. A better way to arm
investors, which he proposed to the SEC in July 2017, would be requiring
brokers and advisers to periodically send clients a report that details all of
the fees they paid—to their broker, the broker’s employer, and others who make
money off their investment choices.
“When people know what they are paying, there
will be pressure for fees to come down,” said Mr. Flannery, now an economist at
the University of Florida.
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