(Bloomberg News) Does your broker work for you? In the past, the answer to that question wasn't quite clear. Under U.S. rules, brokers were required only to steer clients toward "suitable" trades or investments, not necessarily those in their "best interests."

Among the changes already in motion from passage of last year's Dodd-Frank Act are new rules to be written by the Securities and Exchange Commission to clarify the relationship between broker-dealers and their clients.

Under the rules, brokerages will probably have to draw up new disclosures to make clear that they are putting their client's best interests first, a level of responsibility known as a fiduciary standard.

"There's no question that one of the public policy objectives will be to raise the bar for brokerage firms that provide personalized investment advice," said John Taft, chief executive officer of RBC Wealth Management and chairman of the Securities Industry and Financial Markets Association, the lobbying group for the brokerage industry. "The firms that don't put their clients' interests first are going to change how they do business."

As part of the Dodd-Frank financial-services overhaul law enacted last July, Congress asked the SEC to study existing standards. In a staff report issued in January, the commission found that many retail investors are confused by the different roles played by investment advisors and broker-dealers.

Brokers Or Advisors

Registered investment advisors follow principles outlined in the Investment Advisers Act of 1940 and must put their clients' best interests first. Broker-dealers adhere to the Securities Exchange Act of 1934 and currently have only to recommend products that meet their clients' needs when sold.

To ease customer confusion, the commission recommended that broker-dealers adopt a fiduciary standard "no less stringent than currently applied to investment advisors."

Republican commissioners Troy Paredes and Kathleen Casey issued a joint statement taking issue with the report. "The study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisors to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive," the statement said.

Suitability

Under the previous suitability standard, brokers only had to recommend a product consistent with the investor's goals, strategies and risk tolerance. When offering investment options to customers under a fiduciary standard, brokers will now have to document that it is the best choice for the investor, said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America.

The new standard won't necessarily require that brokers include low-cost options in their menu of offerings, Roper said.

The SEC and Financial Industry Regulatory Authority oversee about 5,100 broker-dealers, about 4,500 of them Finra members, according to the agency report and the group's website. In 2009, firms registered with Finra held more than 109 million retail and institutional accounts, with about 18 percent of those brokers also registered as investment advisors with a state or the SEC, the SEC report said.

Total retail assets managed by Finra broker members and registered investment advisors were $13.4 trillion at the end of 2010, according to data from Boston-based research firm Aite Group.

Common Standard

The agency is scheduled to propose rules for a common standard by the end of this year, according to its website. Brokers are expected to both disclose more information before working with customers, and provide more transparency when recommending products that may involve conflicts, Roper said.

"No matter how it's written, if it's written right, it will raise the bar across the industry," Taft said.

The Dodd-Frank Act specifies that the uniform standard can't weaken the existing obligations for advisors, according to Ira Hammerman, general counsel for Sifma. That means the SEC should create parallel rules, which still permit transaction-based advice paid through commissions instead of fee-only advice, he said.

A new standard will likely mandate that brokers provide additional disclosures about services, compensation, and conflicts of interest, said K. Susan Grafton, a former SEC attorney who works in the Washington office of Gibson Dunn & Crutcher LLP. The disclosures may be similar to those required as part of so-called ADV forms that advisors currently provide to investors.

'Create Clarity'

"We already act in a fiduciary capacity, so we think this rule will just augment and create clarity for the consumer," said Mark Casady, chairman and chief executive officer of Boston-based brokerage and advisory firm LPL Investment Holdings Inc.

Since most of LPL's 12,500 advisors are registered both as brokers and investment advisors, they already uphold a fiduciary responsibility, Casady said. Since the firm also doesn't sell proprietary products, he expects the new standard won't really change their practices.

"It makes it clearer to the consumer that there's a fiduciary standard being applied in both cases -- it's more a legal matter than a practice matter," he said.

Under a common standard, the SEC may allow principal trading, which is when firms use their own stock inventories to fulfill trades, without requiring client permission each time a trade is made, said Mercer Bullard, founder of Fund Democracy LLC, an advocacy group in Oxford, Mississippi.
"It would violate Dodd-Frank to say that no broker is ever required under the best interest standard to disclose that," Bullard said.

More Transparency

Other transactions that may require more guidance from the SEC include initial public offerings underwritten by the brokerage firm, said Sifma's Hammerman.

Robert T. Mooney, chief compliance officer of Wells Fargo Advisors, said his firm supports the "harmonized standard of care."

"It appears the standard of care will be a workable one that will continue to provide clients choice when determining the type of relationship they would like to have with their financial advisor," Mooney said in an e-mail.

Richard Ketchum, Finra's chairman and CEO, said at the regulator's annual conference in Washington in May that brokers must "truly understand" complex products, such as structured notes, that they sell.

Representatives of Morgan Stanley  Bank of America Corp. and Edward Jones declined to comment, saying they didn't want to speculate on changes before the fiduciary rules are written.

"The SEC is trying to find the sweet spot to adopt something that has important protections for investors, but doesn't trigger pushback that ends up getting the regulation killed," Roper said.