NEW YORK - Investors just regained their right to be treated poorly. The U.S. Securities and Exchange Commission on Wednesday tightened conduct standards a bit for brokers while loosening them for investment advisers, effectively saying that conflicts of interest must be disclosed rather than avoided. Sharp dissent within the commission over the new rule, called Regulation Best Interest, underscores the weakness of that approach.
The financial crisis showed the need for tougher rules on intermediaries ranging from brokers at the likes of Morgan Stanley and Goldman Sachs to registered investment advisers such as CapTrust, but efforts have struggled. Political differences in a hyper-partisan Washington stymied action by the SEC, prompting the Department of Labor to adopt a fiduciary rule in the last months of former President Barack Obama’s administration. It required brokers and advisers to put clients’ interest first. Before, they merely had to offer “suitable” investments, which was a license to maximize their own profit rather than that of their customers.
The rule, which Wall Street firms argued would drive up costs for small investors and limit the range of products on offer, got tossed out last year. Sales of pricey annuities have duly jumped since the fiduciary rule was overturned – they rose 17% in the first quarter, year-on-year, according to insurance association LIMRA. Now SEC Chairman Jay Clayton has jumped into the breach.
Clayton is a former Wall Street lawyer, and has come down squarely on the industry’s side. The new regulation does some good things, like prohibiting sales tournaments that reward brokers for flogging specific securities. But best interest is a vague concept. And brokers can hawk high-priced products that pay them big commissions so long as they disclose those details. A new interpretation of existing rules for advisers suggests they too can merely disclose conflicts, rather than prohibit them.
Investors already have other options. Cheap index and exchange-traded funds now control as much of the U.S. equity mutual fund market as those run by expensive stock pickers, and firms that charge a flat fee for investment advice have taken a big chunk out of the commission-driven brokerage business. Yet that may just make brokers and advisers more determined to make their money however they can. The SEC just gave them a bit more wiggle room.
- The Securities and Exchange Commission on June 5 adopted a package of rules and interpretations designed to enhance the quality and transparency of retail investors’ dealings with investment advisers and broker-dealers.
- A new rule called Regulation Best Interest stipulates that brokers must exercise “reasonable diligence” in recommending stocks, mutual funds or other investments, and disclose material facts about fees and any conflicts brokers may have, such as recommending products that may benefit them.
- A separate interpretation on the standard of conduct for financial advisers says they owe clients a fiduciary duty and must, at a minimum, disclose all material conflicts of interest.
- The new measures will bring the legal requirements for broker-dealers and advisers “in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost,” SEC Chairman Jay Clayton said.
- Commissioner Robert Jackson, a Democrat, and the SEC Investor Advocate Rick Fleming issued statements criticizing the new rules for not providing enough protection to investors. Jackson warned that the rules “retain a muddled standard that exposes millions of Americans to the costs of conflicted advice,” Jackson said.
(Editing by John Foley and Amanda Gomez)
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