Under the new sales conduct standards proposed by the Securities and Exchange Commission, brokers would no longer be able to recommend the most expensive investment appropriate for investors, SEC Chairman Jay Clayton told an overflow crowd at the SEC’s Atlanta Investor Town Hall on Wednesday.
He was answering a question from an Atlanta AARP executive who asked pointedly if there is a difference between suitability and best interest in the SEC’s new Regulation Best Interest (Reg BI) proposal, which the agency says will better protect investors by reducing conflicts of interest like higher compensation that can act as an incentive for brokers to sell more expensive investments than customers may need.
“With best interest, we’re proposing to raise the level of requirement on broker-dealers when they’re making a recommendation and it is different than what they have today. So the short answer is yes,” Clayton said.
“With suitability, if you come up with two investments for clients, you are allowed to look at which investment makes you the broker more money. Under our new standard you will not be allowed to do that. You can not put your interests ahead of client interests,” Clayton said.
“We will require policies and procedures to get to a place where recommendations also reflect a duty of care that is enhanced [in the regulations of brokers],” Clayton added.
The AARP is one of a number of critics, however, that does not believe that Reg BI goes far enough to protect consumers and wants to see an unequivocal fiduciary standard applied to broker sales conduct.
David Certner, legislative counsel and director of legislative policy for government affairs at AARP, will lobby for a fiduciary standard at the SEC’s Investor Advisory Committee meeting Thursday on Reg BI.
In advance of the meeting, Certner sent Clayton a letter laying out the AARP’s concerns. Specifically the AARP believes that the SEC’s final rule must do two things: clearly define the standard of conduct for investment professionals as a “fiduciary standard,” and provide investors with unambiguous, effective disclosure forms.
“The current SEC proposal does not clearly define a ‘best-interest standard,’ and we believe it must do so,” Certner said in the letter. “Investors also do not understand the different legal standards, or the disclosure forms that apply to different types of financial professionals.”
As consumers save for retirement, they lose as much as $17 billion each year due to profit-driven advice from financial advisors and brokers that is stacked with hidden fees and unfair risk, the AARP said.