Beyond just disclosing conflicts of interest, firms and brokers must mitigate and eliminate conflicts wherever possible under the agency’s best-interest rules proposal, an SEC official said Tuesday.
“Probably the biggest change would be a new requirement for broker-dealers to address conflicts," Brad Refearn, director of the SEC’s Division of Trading and Markets, told an audience at Finra's annual conference in Washington, D.C. "The proposed conflict obligations would require broker-dealers to establish, maintain and enforce policies and procedures reasonably designed to identify and address material conflicts of interest.
“Specifically, conflicts that are financial incentives would be required to be mitigated and disclosed, or eliminated,” Redfearn said.
“A broker-dealer would not satisfy its care obligation by simply recommending the least expensive or least remunerative security without any further analysis," he said. "Depending on the facts and circumstances, it could be in a retail customer’s best interest to allocate investments across a variety of securities, or to invest in riskier or more costly products ... if the broker-dealer had a reasonable basis to believe that the higher cost was justified based on other factors, in light of the customer’s investment profile. This is important in preserving investor choice and ensuring that investments other than the cheapest or least sophisticated can be offered to retail customers.”
The public has until August 7 to comment on the SEC’s three proposals, which include the best interest proposal for brokers (Reg BI); a clarification and proposed new requirements, including capital standards for investment advisors; and a new four-page customer disclosure form that advisors, brokers and dually registered brokers would be required to use.
Whether an investor is working with an advisor or broker, the SEC wants professionals and their firms to clarify what consumers can expect from their brokers, SEC Chairman Jay Clayton said during a Q&A at the Finra conference.
“They can’t expect guaranteed returns,” Clayton said. “But in both cases, the professional can’t put their interests ahead of customers. For those who believe the SEC has left daylight between the two types of professionals' proposed standards, the core duty is the same.”
To that end, the new relationship disclosure Form CRS the SEC is proposing should help consumers understand who they’re working with, Clayton said.
“I hope that in less than three, four, five minutes we could explain, ‘Here’s my business model. Here’s how I work. Here’s how I get paid,’” said Clayton, who said he wants to hear feedback and see industry samples of how firms are proposing to accomplish the SEC’s disclosure mandates.
While Clayton wants to see brokers and advisors fully disclose their compensation and specify whatthey’re selling and why, “I’m not ready to limit or prescribe mutual fund classes.”