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The Securities and Exchange Commission (SEC) on Wednesday approved new financial advisory standards for investment dealers and financial advisers, likely putting in place a legal battle with consumer advocates who called for tighter rules.
The Republican-controlled SEC voted in favor of the parties to finalize a package of four measures to strengthen and clarify the rules for brokers and investment advisors, while limiting conflicts of interest with their counterparties. customers.
SEC chair Jay Clayton and GOP commissioners Hester Peirce and Elad Roisman voted for the measures. Robert Jackson Jr., the agency's only Democratic Commissioner, voted against it.
"This action is long overdue," Clayton said Wednesday, noting the "decades of experience and expertise of SEC staff, information and feedback received from investors and other market players" in the 14 months since the package was proposed in April.
The SEC's rule comes almost ten years after the 2010 Dodd-Frank Act ordered the agency to draft regulations for brokers and investment advisers. Last year, a harsher rule issued in 2016 by the Obama Department of Labor was invalidated in federal court.
Dodd-Frank commissioned the SEC to establish a universal standard for investment dealers and advisers. The commission had made little progress on the rule under former SEC president Mary Jo White, drawing the wrath of progressive politicians.
Under pressure from consumer activists and their congressional allies, the Labor Department pre-empted the SEC in 2016 and released its own proposal. This rule requires investment dealers to adopt the "fiduciary" standard applied to investment advisers, which imposes strict rules of conduct to protect small investors.
A federal court overturned the Labor Department's decision in June 2018, just two months after the SEC finally released its own proposal in April 2018.
Unlike the Department of Labor, the SEC has different codes of conduct for brokers and investment advisers. Instead, the agency's proposal requires brokers to act in the best interests of the client when making specific investment recommendations, without creating a long-term obligation to seek out the client.
"Brokers and investment advisers both play an important role in helping retail investors achieve their long-term financial goals, but they do so in a very different way," Clayton said Wednesday.
"A unique approach to regulating the standards of conduct of financial professionals presents a significant risk," he added.
Wall Street business groups and investment firms complained that the Labor Department's rule imposed unnecessary regulatory burdens that would increase costs and prevent investors from obtaining affordable financial advice.
The centerpiece of the SEC's new proposal, a rule called Regulation Best Interest, sets new standards for brokers, with the goal of ensuring they provide customers with the financial products best suited to their needs.
The rule imposes on brokers a code of conduct that requires them to prioritize the financial needs of customers over fees or commissions they would receive from the sale of a less suitable product.
The rule also requires broker-dealers to mitigate or eliminate potential conflicts of interest by disclosing any financial incentives the dealer has to sell certain products. The broker must also "exercise due diligence, care, skill and prudence" to ensure that the recommended products are in the best interests of the client.
The industry on Wednesday welcomed the proposal.
"The Commission will bring certainty to Main Street investors, working families who are saving and investing for a better future, as well as finance professionals across the country who are doing what they do." It's fitting every day, "said Chris Iacovella, president and chief executive officer of the American Securities Association. trade group for regional investment firms.
"This vote further reinforces President Clayton's legacy to the first investor and restores the SEC as the appropriate regulator of business-customer relationships"
But Democrats and consumer groups have criticized the proposal as too weak to protect average investors when it comes to receiving financial advice.
Jackson, the only Democratic commissioner, called the proposal a "political solution in legal jargon" that "would fail to arm the Americans with the tools they need to overcome the retirement crisis the country is going through."
"Rather than requiring Wall Street to give priority to investors, the current rules maintain a confusing standard that exposes millions of Americans to the costs of contradictory advice," Jackson said.
Jackson, who will leave the SEC this year, urged critics of the proposal to fight for tighter rules before a possible legal battle.
Consumer advocates have argued that the SEC rule is too vague and lenient to prevent retail investors from facing conflicting advice on investment advice. Critics of the rule have asked the SEC to impose a fiduciary standard on brokers and to prohibit earnings-based incentives related to product sales.
"The Commission has just thrown investors under the bus," said Barbara Roper, director of investor protection at the Consumer Federation of America (CFA), in a tweet on wednesday.
In a 24-page letter to Clayton in April, the CFA and other consumer rights advocates asked the SEC to ban financial incentives that could create conflicts of interest, To force brokers to consider a wider range of products and to protect investors from the cost of conflicting recommendations. .
On Wednesday, the SEC also approved an updated form allowing a broker or investment advisor to explain his obligations to a client and to explain the agency's code of conduct for them. investment advisers and boards subject to the general rule.
The SEC's interpretation of the investment adviser's fiduciary duty has also alarmed critics of the proposal, including Rick Flemming, the Commission's investor advocate.
Flemming stated that the SEC had adopted the view that the fiduciary duty of an investment advisor could be satisfied by the mere disclosure of conflicts of interest. He argued that this effectively weakened the fiduciary standard, which is supposed to be the strictest code of conduct for investment professionals by the SEC.
"I do not believe that this is what an investor could reasonably expect from a trustee, nor does it correspond to the way in which investment advisors tend to see and describe their investments. fiduciary duty, "said Flemming.
Updated at 15:01
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