WASHINGTON—Stockbrokers will be required to act in the best interest of investors and disclose more about conflicts of interest that can skew advice under a regulation approved Wednesday.
The Securities and Exchange Commission voted to issue what it calls Regulation Best Interest, creating a duty to investors for brokers that the industry says is higher than its current standard.
The SEC said the new rule aims to give investors more information about complex pay incentives and other practices that can influence a broker’s advice, without uprooting Wall Street’s commission-based sales model. The SEC didn’t impose a higher “fiduciary” duty that applies to investment advisers, who unlike brokers are paid to manage assets on an ongoing basis.
Brokers were once paid mostly to execute clients’ trades. As technology has automated that task, they have shifted to giving clients more investment advice. The SEC has for years allowed brokers to call themselves financial advisers without requiring them to disclose all conflicts of interest or put clients’ interests ahead of their own financial rewards.
Brokers and advisers will continue to be governed by two standards, although the industries have significant overlap and many households are confused by the difference between them.
The SEC passed Wednesday’s measures on a 3-1 vote along party lines. The commission has one vacancy.
SEC Chairman Jay Clayton said the best interest rule moves the broker standard closer to the one for advisers. “We elevate, enhance and clarify these obligations in a comprehensive manner,” Mr. Clayton said. “This action is long overdue.”
SEC Commissioner Robert Jackson Jr., the Democratic member who dissented, said the rule is a “weak mix of measures.” He also said a parallel SEC move on Thursday to spell out the fiduciary duty for investment advisers will lower that standard.
Mr. Jackson said the SEC deleted language from an earlier version of its guidelines that said investment advisers must put client interests first. The SEC replaced that with “legalese” that says an adviser “must not place its own interest ahead of its client’s interests,” he said.
Other SEC officials, including Mr. Clayton, said the updated guidelines didn’t weaken the fiduciary duty.
The final regulation for brokers is similar to a proposal the SEC issued last year, which consumer advocates criticized as too weak. The rule doesn’t require brokers to recommend the lowest-cost mutual funds or other types of products; cost is just one factor that brokers must consider to ensure advice meets a client’s best interest.
Brokers currently meet a more flexible standard known as suitability, which requires their recommendations meet an investor’s goals and risk tolerance. While brokers will have to meet a higher bar, the rule doesn’t spell out specific practices that violate the best interest standard. The new rule relies on more explicit, written customer disclosures about fees.
Mr. Clayton and other officials said disclosure isn’t enough to always satisfy the rule. Brokers will need to write policies to achieve its ends, which will require reducing conflicts of interest such as supersize commissions for hitting higher sales targets.
The brokerage industry has been largely supportive of the SEC’s plan but asked for detailed guidelines to make compliance easier.
Wall Street’s satisfaction with the SEC’s approach is a significant change from its opposition to a stricter broker rule put forward under the Obama administration. Business groups sued over the Obama-era measure, which called for brokers to assume the highest duty of loyalty when they handled retirement assets. A federal appeals court sided with the business groups last year, striking down the plan.
The SEC’s regulation to be approved Wednesday won’t ban particular conflicts of interest other than sales contests that reward brokers for selling specific products. The SEC determined that giving brokers free trips or bonuses for placing clients into certain funds or annuities couldn’t serve the best interest of clients.
Brokers will have to reduce other types of conflicts, while in some cases that can be accomplished through disclosure alone, officials said. Consumer advocates say that is one reason the rule won’t disrupt murky pay practices that can harm clients.
The rule directs brokers to write their own policies to minimize financial conflicts.
The rule also will require that brokers disclose when they pick from a limited range of mutual funds or other investments, officials said. That happens because firms make more money by selling their own products and sometimes have deals with other fund managers that pay the broker a cut of their revenue.
The SEC’s regulation won’t overtake state requirements, officials said. Some states have pursued or passed their own rules that are possibly more stringent than what the SEC plans to approve Wednesday. But the SEC concluded it doesn’t have authority to override those particular state regulations, officials said.
Nevada and New Jersey are among the states that have pursued their own fiduciary standards for brokers.
One change included in the final regulation: the SEC said the best-interest duty applies to the decision of what type of account—including rollovers from 401(k)s to Individual Retirement Accounts—is recommended to an investor.
Brokerage accounts can be cheaper for investors who don’t trade often and will carry the best interest requirement. Investment advisory accounts levy annual percentage fees, instead of commissions, and require a stricter standard of customer loyalty, known as a fiduciary duty.
Many brokers are able to offer both types of accounts. Investment advisers must continually look out for their client’s best interest, while the brokers’ duty is tied only to specific recommendations.
The SEC also approved a requirement that firms provide clients with a brochure that explains the way brokerage and investment advisory accounts work. For brokers, the brochure can only be two pages, or half as long as the SEC proposed last year. A range of commenters said the SEC’s original concept for the brochure was confusing and would be hard for some individual investors to understand.
Write to Dave Michaels at dave.michaels@wsj.com
https://www.wsj.com/articles/new-sec-rule-heightens-broker-responsibilities-to-investors-11559743201
2019-06-05 16:41:00Z
52780309279993
Bagikan Berita Ini
0 Response to "New SEC Rule Heightens Broker Responsibilities to Investors - The Wall Street Journal"
Post a Comment