Wall Street Broker Conflict Regulations Approved by Divided SEC
(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.
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 rule, which is 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.
Republican Commissioners Hester Peirce and Elad Roisman joined Clayton in supporting the measure, which hasn’t been publicly released. Robert Jackson, the lone commissioner in a Democratic seat, dissented.
The regulation — which will affect tens of millions of investors who buy stocks and bonds to save for college, retirement and new homes — has 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 Association. Wall Street’s main trade group has also lauded the effort.
Support from the industry, which successfully sued to overturn Obama-era rules that were more stringent, has only heightened concern among opponents that the SEC measure is a giveaway to bankers that will confuse investors. Some are already contemplating a legal challenge and have been mobilizing a public relations campaign against the regulator.
The clash took center stage at the SEC’s Washington headquarters on Wednesday. Jackson blasted the rule, arguing it falls far short of requiring “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 attire.
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 regulation requires 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 rule when they transfer customers to an Individual Retirement Account from another retirement account.
Before Wednesday’s vote, the rule’s critics had been particularly concerned that it would go beyond setting standards for brokers and end up weakening the long-standing fiduciary obligation for investment advisers. Consumer advocates have long argued that both should be held to the same strict obligation, even though they have slightly different business models.
Clayton dismissed those concerns, saying the rule doesn’t at all soften the fiduciary obligation that already exists 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.’’