The SEC's best interests rule will probably not help investors, critics say

Wall Street won another major victory Wednesday on the rules of the Obama era.

The Securities and Exchange Commission has approved a rule requiring brokers not to put their own interests ahead of those of their clients. But the rule does not correspond to what many consumer advocates consider necessary to resolve the conflicts of interest that cross Wall Street and is much weaker than the rule adopted under the Obama administration.

The SEC approved the settlement by 3 votes to one, with the only Democrat on the committee, Robert Jackson, voting against. Jackson is a law professor who has been on the committee since January 2018.

"This action is long overdue," said SEC chairman Jay Clayton, noting that 43 million Americans had a retirement or brokerage account. The rule "benefits retail investors and our markets for years to come".

The rules are the culmination of a nearly ten-year-old battle between the financial community and consumer advocates. This could affect millions of people every year who seek financial advice when buying shares or mutual funds or when saving for retirement or college.

Brokers are required to recommend "tailored" investments to their clients that are tailored to their financial goals and risk tolerance. Proponents say the SEC's rule would improve this standard by requiring brokers to offer their clients not only "appropriate" investments, but also those that are in the best interest of their clients. Brokerage firms would also be required to disclose potential conflicts of interest and the amount they could draw from specific recommendations.

Consumer advocates called the SEC's approach weak and said consumers remain vulnerable. The rule, for example, does not define what would be considered to be in the best interests of the client, leaving brokers and other investment advisors significant leeway to define it themselves, they say.

Nor does it correspond to the similar regulations adopted by the Labor Department, which oversees retirement accounts, under the Obama administration and which the financial sector has successfully challenged in court. The Obama administration has estimated that brokers' conflicts of interest and weak consumer protection cost IRA investors up to $ 17 billion a year in excessive fees.

"Rather than asking Wall Street to give priority to investors, the current rules maintain a confusing standard that exposes millions of Americans to the costs of conflicting advice," Jackson said. The SEC did not "arm the Americans with the tools they need to survive the retirement crisis in this country."

Rick Fleming, the SEC's investor advocate, was also disappointed by the rule. "Even if they are not as strong as possible, they are a step in the right direction," Fleming said in a statement issued after the committee hearing. But he failed in many places, he said.

The SEC, for example, missed an opportunity to clearly define the differences between a broker and an investment advisor, Fleming said. An investment advisor is generally required to adhere to higher standards for the protection of consumer interests.

"I predict that the same confusion will exist in ten years," Fleming said in his statement. "The Commission has had the opportunity to help investors by clarifying the links between investment advisers and investment dealers, but has formalized its long-standing acquiescence to the brokerage industry's preferences."

Democratic legislators have also criticized the rule.

"The SEC's new rules make it easier for Wall Street to prevent families from making their hard-earned savings," said Senator Elizabeth Warren (D-Mass.), Banking Sector Critic and Presidential Candidate, in a statement. communicated.

Representing Maxine Waters (D-Calif.), Chair of the House Financial Services Committee, said: "Instead of providing protections so that workers and their families are not scammed when they invest their money. hard-earned savings, this rule will only create confusion. I urge the SEC to repeal this rule and give priority to the interests of savers and retirees. "

The financial industry said it agreed to modernize the rules for brokers, but opposed the Obama administration's approach, which some say left it open to prosecution and limited choice of investments offered to consumers.

The SEC's proposal "goes beyond" to eliminate potential conflicts of interest, including the ban on sales contests that encourage brokers to sell a certain financial product, said Samantha DeZur, executive director. Capital Markets Competitiveness at the US Chamber of Commerce. "These rules will protect investors while preserving their choices regarding different types of advice."