The U.S. Securities and Exchange Commission on Wednesday proposed overhauling its conflict-of-interest rules for brokers, a move likely ensuring that Wall Street won’t have to comply with much tougher regulations approved at the end of Barack Obama’s presidency.
At a public meeting in Washington, SEC commissioners led by Chairman Jay Clayton voted 4-1 to seek public comment on a “best interest” obligation for brokers. While the standard is stiffer than existing SEC requirements, it’s not as stringent as the fiduciary duty that forces investment advisers to put clients’ interests ahead of their own.
In 2016, Obama’s Labor Department sought to extend a fiduciary obligation to brokers who offer retirement advice, but those strictures are in limbo after being struck down by a federal appeals court.
The SEC proposal comes after weeks of wrangling among the agency’s commissioners and months of input from investor advocates and industry groups. The regulations mark an attempt by Clayton -- a former big bank lawyer appointed by President Donald Trump -- to address legal and regulatory uncertainties triggered by Labor’s controversial rules.
If the SEC’s roughly 1,000-page plan goes into effect, the industry expects it to replace the Obama-era constraints.
Clayton called the proposal “sound” and said it is “an effort to fill the gaps between investor expectations and legal requirements.”
Specifically, the SEC proposal requires that brokers disclose all “key facts” about potential conflicts and mandates that they have a “reasonable basis” to conclude investment products are in their clients’ best interest, the agency said in a statement. It would also require that firms note and mitigate “material conflicts of interest” related to financial incentives.
The proposal drew criticism from several commissioners because it doesn’t specifically define what “best interest” actually means. It also wouldn’t expressly prohibit practices that investor advocates say can encourage bad behavior, such as offering free vacations to brokers who meet sales targets.
To address confusion over titles used in the financial industry, the SEC proposed that brokers be banned from referring to themselves as “advisors” or “advisers.” The agency voted to propose guidance clarifying the fiduciary responsibilities that investment advisers face.
The SEC is also calling for brokers and advisers to provide clients with a disclosure form, which can’t exceed four pages, to explain their services, fees and conduct standards.