Trump's SEC Proposes Obama-Era Broker Conflict Rules Rewrite
(Bloomberg) -- 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.
The full proposal -- which hasn’t been released publicly -- is also expected to expand how the agency defines churning, a practice in which brokers inappropriately make money off customers by excessively buying and selling securities, according to a person familiar with the plan. That change could make it easier to sanction brokers for misconduct, said the person who asked not to be identified discussing details that hadn’t been made public.
Consumer advocates contend that long-standing guidelines, which only mandate that brokers offer “suitable” investments, can lead to customers being overcharged or steered to high-fee products. SEC Commissioner Kara Stein, a Democrat, said the agency’s proposal won’t eliminate such conduct.
“Despite the hype, today’s proposals fail to provide comprehensive reform or adequately enhance existing rules,” said Stein, who voted against seeking public comment. “In fact, one might say the emperor has no clothes.”
Trade groups representing brokers, financial firms, mutual fund companies and insurers said they were generally pleased with the SEC proposal.
“This package of proposals has the potential to be a real win for all types of investors, from the young family starting to invest for the future to an older investor approaching retirement,” David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement.
The chamber was one of a number of associations that sued to overturn the Labor Department’s fiduciary rule. A federal appeals court vacated the regulation in a March decision, and it’s unclear whether the department will appeal.
Consumer advocates panned the proposal, agreeing with Stein that it would do little to help investors -- and could, actually, confuse them more.
“What we need is a straightforward, enforceable rule that would clearly require brokers to act in their clients’ best interests when giving advice,” said Marcus Stanley, policy director for Americans for Financial Reform, in a statement. “The proposal we heard described today does not come close to measuring up.”
And on Twitter, AFL-CIO President Richard Trumka panned the SEC’s action, calling it “insufficient to hold Wall Street accountable.”
“We won’t stop fighting,” Trumka wrote.
The SEC will solicit feedback for 90 days. It will then amend its proposals before holding a second vote by commissioners on whether to make the regulations binding.
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