The SEC doesn’t outright ban any practices, either. Rather, it highlights activities that "generally involve conflicts of interest," such as brokers peddling their employers’ own products. The agency also lists practices that it suggests firms should consider avoiding entirely, including sales contests and offering free vacations and prizes for top performers. Generally, the SEC said the conduct policies that firms have to establish should address sales tactics that could be problematic.
What do brokers have to do to show they are in compliance?
It’s not entirely clear.
Rather than specifying exactly what constitutes compliance, the rules require brokers to "reasonably” share “material facts." The SEC says this open-ended approach will prevent firms from drowning clients with unnecessary information just to satisfy regulators’ demands.
The agency even gives advice for compliance departments: keep it simple. In its proposal, the agency encourages short sentences and an active voice, while avoiding jargon.
What are the implications of the SEC leaving things murky?
Not being prescriptive could give regulators flexibility to crack down on shady behavior where they see it. For instance, if the SEC says certain conduct is prohibited, brokers may gravitate to practices that aren’t banned but are just as detrimental to clients.
However, the vagueness has also fueled concerns that the SEC’s proposal fails to make clear what’s allowed and what isn’t. When things are left murky, compliance departments often act conservatively, telling brokers to avoid everything that they fear regulators might question.
The SEC is encouraging the industry and investor advocates to offer feedback on whether it would be a better approach to specifically define what it means to act in a clients’ best interest.
Is the broker business model irreparably conflicted?
The SEC’s proposal notes explicitly that brokers, who make money by charging clients commissions on transactions, are conflicted when they make recommendations. That’s because the more a customer trades, the more money their broker makes. In contrast, investment advisers get paid fees based on how much money they manage and how profitable their investments are.
The SEC said it doesn’t want to overhaul the industry and "prohibit a broker-dealer from having conflicts when making a recommendation." Instead, its approach is to force brokers to disclose more and avoid recommendations that clearly benefit brokers at the expense of their clients.
How have financial firms reacted to the SEC’s proposal?
Mostly with quiet relief.