So how does the SEC regulate brokers’ conflicts of interest?
“You can see that opponents of the DOL rule would prefer disclosure as a remedy to conflicted advice while some industry and consumer groups think that’s insufficient,” Thompson said.
The DOL’s fiduciary rule actually goes beyond disclosure to prohibit brokers from engaging in certain conflicts. When the DOL adopted its rule in 2016, staff said outright that disclosure wasn’t sufficient to fully manage some conflicts of interest. For instance, the DOL’s fiduciary rule states that it is not enough for a broker to disclose that she or he is accepting 12b-1 mutual fund fee compensation. “The practice has to be avoided entirely,” Thompson said.
The conflict of interest with 12b-1 fees, for instance, is that the additional payments from some mutual funds may induce a broker to sell one fund over another that is less expensive and better suited to the client’s needs—all because he or she receives higher compensation from the fund offering 12b-1 fees.
In contrast, the SEC allows advisors to accept 12b-1 fees if they disclose the practice in their Form ADV, if they believe it is warranted and if they discuss the conflict with clients.
It is unclear where the SEC will come down in its proposal on these types of conflicts with regard to brokers.
While disclosure “in concept allows a prospective client to decide whether they want to hire an advisor and take his or her advice based on what they’ve told you, studies have reported that it can work the other way, by giving investors a misplaced sense of trust” that a broker has the client’s best interest at heart, Thompson said.
“If you want to look at the stringency of disclosure on a scale of 1 to 10, 10 being the toughest fiduciary standard, right now the DOL standard is a 10 and the SEC’s is a 7,” Thompson said.
The Financial Planning Coalition said in an earlier statement that “SEC rulemaking on standards of conduct for broker-dealers providing personalized investment advice to retail investors is long overdue.” But the coalition want an SEC rule to complement rather than replace the DOL’s fiduciary rule. Coalition members include the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.
It is unclear if the DOL fiduciary regulation will survive a lawsuit from the ACLI, the Financial Services Institute, Sifma and the U.S. Chamber of Commerce, among other parties, which seeks to force the agency to vacate the rule on grounds that it is allegedly hurting smaller investors. FSI and Sifma argue that brokers are dropping their commission-based business in favor of fee accounts, which are more expensive or not an option for investors with smaller accounts. A decision on the rule is expected from the Fifth Circuit Court of Appeals in New Orleans in the next few weeks.