S.E.C. Seeks to Require Brokers to Put Their Clients First

In a long-expected move that would affect the roughly 43 million households with brokerage or retirement accounts, the Securities and Exchange Commission voted on Wednesday to propose rules that would require brokers to put their customers’ financial interests ahead of their own.

But not everyone is convinced the rules — if passed as proposed — would go far enough to improve consumer protections, including some of the S.E.C.’s own commissioners. Some of the five commissioners said they had concerns with different pieces of the proposal, suggesting that it may be difficult for them to coalesce around a final rule.

Kara M. Stein, an S.E.C. commissioner, called the proposed rules a squandered opportunity to provide meaningful change, and suggested a new name for the proposal, now called Regulation Best Interest.

“Perhaps it would be more accurate to call it regulation status quo,” Ms. Stein said at an open meeting in which she strongly criticized the proposal and was the sole vote against it.

The 4-to-1 vote opened the proposal to public comment just weeks before the Department of Labor, which oversees retirement accounts, must decide whether it will take steps to resuscitate its own best interest standard. The future of that rule remains uncertain.

The S.E.C.’s proposal includes three parts. First, it would require brokers to put their customers’ interests first when making investment recommendations. Second, it would require registered brokers and registered investment advisers to provide a brief summary of their relationship with clients. And last, it would reaffirm and clarify the existing rules of conduct for investment advisers, who are held to a higher standard than brokers.

Consumer advocates said they had yet to go through the details of the roughly 1,000-page proposal, but they were worried that the rule did not make it clear what the best interest standard meant, and that it could potentially confuse consumers.

“If you don’t define that best interest requires the broker to recommend the best available investment option — based on reasonable assumptions and a careful assessment of the needs of the investor and the characteristics of the investor — it shouldn’t be called a best interest standard,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It is a step in that direction, but not a true best interest standard.”

The proposed rules would also restrict certain brokers from calling themselves advisers, so that investors are not misled into believing a broker is a registered investment adviser, which must act as a fiduciary, an even higher standard.

It might seem that requiring financial professionals to put customers first would gain universal support, but the battle to get such rules passed has been long and arduous. The financial services and insurance industries have aggressively opposed such rules, arguing that they curtail investor choice and increase compliance costs.

Under the Obama administration, the Labor Department passed consumer protections, drafted over six years, that required financial professionals, including brokers and insurance agents, to act in their customers’ best interests, but only when handling their tax-advantaged retirement money. It took partial effect in June last year, but its full execution was delayed by the Trump administration.

In March, a federal appeals court panel ruled that the Labor Department, which oversees retirement accounts, had overstepped its authority and struck down the requirement. Its fate depends on whether the Trump administration appeals the decision — something it must do by the end of this month — or whether the full appellate court decides to hear the case, consumer advocates said.

Before the Labor Department rule was proposed, brokers had to ensure only that their recommendations were suitable, which is a lower standard. Hester M. Peirce, a commissioner who voted in favor of the proposal, said at the meeting on Wednesday that the proposed best interest standard was actually an enhanced version of the status quo.

“It would be better to acknowledge that we are offering a suitability-plus standard,” she said.

Based on their reading of the proposal thus far, advocates said, the rule is not as strict as the Labor Department’s and relies too much on disclosure. At a minimum, brokers would be required to disclose and “mitigate” conflicts, but the rule would not require them to broadly eliminate them.

“The standard of conduct the agency has articulated appears ambiguous at best,” Marcus Stanley, policy director at Americans for Financial Reform, said in a statement. “It doesn’t simply ban the sales quotas and other compensation practices that lead brokers to put their clients into high-fee, lower-yielding investments.”

Over the years, it has become more difficult for consumers to understand where the loyalties of their advisers lie, especially as product-pushing brokers have started to rebrand themselves as full-fledged financial advisers. Under that guise, many investors assume that the brokers are acting in their best interest, much as a doctor or lawyer might.

Kenneth E. Bentsen Jr., president and chief executive of the Securities Industry and Financial Markets Association, a trade group whose members include large Wall Street firms, said in a statement that the organization was pleased that the S.E.C. had initiated the process to create “a heightened best interest standard” and would share its views during the comment process.

The American Council of Life Insurers said that it was also encouraged by the proposal, and that it would support “reasonable and appropriately tailored rules that require all sales professionals to act in consumers’ best interest.”

What form that should take, however, will be the subject of debate in the months ahead.

Content originally published on https://www.nytimes.com/2018/04/18/business/sec-brokers-rules.html by TARA SIEGEL BERNARD