Wall Street Broker Conflict Rules Approved by Divided SEC

(Bloomberg) -- Wall Street’s main overseer approved new conflict-of-interest rules for brokers, a sweeping regulatory overhaul that drew criticism from investor advocates for being too lax.

The measures, approved by a divided U.S. Securities and Exchange Commission Wednesday, require brokers to act in the “best interest” of clients. What that actually means, however, remains in dispute and the changes are unlikely to end a decade-long fight over the protections.

SEC Chairman Jay Clayton said at a public meeting Wednesday that the agency’s action will “enhance the quality and transparency” of services that financial firms provide clients, particularly when it comes to disclosing conflicts.

He added that the rules, which are similar to a version that the SEC first proposed in April 2018, clear up confusion customers have regarding the different codes of conduct that apply to brokers and investment advisers. Clayton also disputed criticisms that the plan fails to enhance investor protections.

Republican Commissioners Hester Peirce and Elad Roisman joined Clayton in supporting the measures. Robert Jackson, the lone commissioner in a Democratic seat, dissented.

The regulations -- which will affect tens of millions of investors who buy stocks and bonds to save for college, retirement and new homes -- have won widespread backing from financial firms.

Brokers will “finally have a rule that says you can’t put the firm’s interest ahead of the client,” said Christopher Iacovella, who represents regional brokerages as chief executive officer of the American Securities Association. The Securities Industry and Financial Markets Association, which represents large Wall Street firms, and the Investment Company Institute, whose members include large mutual funds, also lauded the regulation.

Support from the industry, which successfully sued to overturn Obama-era rules that were more stringent, only heightened concern among opponents that the SEC measures are a giveaway to bankers that will confuse investors. Some are already contemplating a legal challenge and have been mobilizing a public relations campaign against the regulator.

The clash took center stage at the SEC’s Washington headquarters on Wednesday. Jackson argued the rules don’t force “Wall Street to put investor interests first,” while the SEC’s in-house investor advocate said the measures weaken existing standards.

AARP, the 38 million member lobbying organization that represents the interests of older Americans, demonstrated its opposition by sending representatives to the SEC meeting dressed in the group’s signature red attire.

AARP members wanted “to show the faces of real people who will be impacted by the failure of the SEC to put investors’ interests first,” David Certner, the group’s legislative policy director, said in an emailed statement.

Some of the broader issues surrounding the broker rule, including income inequality and the middle class’s lack of retirement savings, have become talking points for progressive lawmakers. Amid that backdrop, the SEC action may be seized upon by Democrats seeking to defeat President Donald Trump in 2020.

Indeed, Senator Elizabeth Warren, a Massachusetts Democrat who’s running for president, said Wednesday that the regulations "make it easier for Wall Street to cheat families out of their hard-earned life savings.”

The regulations passed Wednesday require the industry to clamp down on conflicts that could encourage firms to put their interests ahead of their clients, such as contests that reward brokers for selling more securities than peers. The rules also prohibit brokers from exclusively selling their employers’ products. The regulator clarified that brokers have to comply with the requirements when they transfer customers to an Individual Retirement Account from another retirement account.

But, critics said they’re particularly concerned that the regulations go beyond setting standards for brokers by softening the long-standing fiduciary obligation for investment advisers. Consumer advocates have long argued that both should be held to the same strict obligation, even though they have slightly different business models.

Rick Fleming, the SEC’s investor advocate, said in a statement that the rules weaken “the existing fiduciary standard by suggesting the liability for nearly all conflicts can be avoided through disclosure.” Fleming added that the new broker requirements are “a step in the right direction,” but were undermined by the SEC’s revised interpretation of the fiduciary obligation for investment advisers.

During the SEC meeting, Clayton dismissed such criticisms, saying the rules don’t at all soften existing standards for money managers.

Barbara Roper, director of investor protection at the Consumer Federation of America, told reporters after the vote that advocates would make it a priority to re-visit the rule as soon as there was Democratic leadership at the SEC.

“No one should make the mistake of assuming this fight is over,” she said. “In the meantime, the burden will be on investors to protect themselves, since the SEC is unwilling to do so.”

To contact the reporters on this story: Ben Bain in Washington at bbain2@bloomberg.net;Robert Schmidt in Washington at rschmidt5@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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