SEC proposal will curb brokers putting clients into products solely for highest revenue, Clayton says

At investor town hall in Atlanta, the agency's head urges clients to press advisers on fees

Jun 13, 2018 @ 5:27 pm

By Mark Schoeff Jr.

Securities and Exchange Commission Chairman Jay Clayton said Wednesday that the agency's proposed investment-advice reforms would curb brokers' ability to recommend products that give them the most revenue.

In response to a question from an audience member at the SEC's investor town hall at Georgia State University in Atlanta, Mr. Clayton explained how the SEC's proposed regulation to require brokers to act in the best interests of their clients would differ from the current suitability standard that governs brokers.

"In suitability, if you come up with two investments that are suitable for your client, there are people who will argue that you are allowed to look at which investment makes you, the broker, more money and put the client in that investment," Mr. Clayton said. "Under our new standard, you will not be allowed to do that. You can't put your interest ahead of your client's interest."

Mr. Clayton added, "We're going to require policies and procedures so that the exercise the broker-dealer goes through to get to that place where they're going to make a recommendation also reflects a duty of care that is enhanced."

Lee Baker, owner and president of Apex Financial Services in Atlanta, had asked Mr. Clayton to contrast the so-called Regulation Best Interest with suitability.

"I was happy to hear that this standard will be elevated from the suitability standard," said Mr. Baker, who is the president of Georgia's chapter of AARP. "I'm taking [Mr. Clayton] at his word. I'm hopeful."

AARP, which represents about 38 million Americans in or near retirement, supplied several members of the town hall's audience of more than 250 in downtown Atlanta. Mr. Clayton and the four other SEC members participated in the event.

AARP was a strong proponent of the Labor Department's fiduciary rule and tried to intervene in a lawsuit that resulted in the U.S. 5th Circuit Court of Appeals striking down the regulation.

With the DOL rule at death's door, the SEC has taken the lead in investment-advice reform with a proposal that is open for public comment until Aug. 7.

Mr. Clayton opened the town hall by talking to the audience about choosing a financial professional. He stressed that they should be familiar with the differences between brokers, whom he described as being transactional and charging commissions, and investment advisers, whom he described as having longer-term relationships with investors and charging flat fees.

No matter which choice investors make, they should know how the financial professional is being paid, Mr. Clayton said.

"When you understand someone's incentives, you have a much better relationship with them," he said. "If they can't explain this to you, you need to think twice: How much of my money that I'm giving you is actually going to work for me?"

That theme ran through the remarks of other SEC members.

For instance, SEC commissioner Michael Piwowar said that one of the most important questions investors should ask about mutual funds and exchange-traded funds is how much they charge in fees. They should know that fees compound as well as returns.

SEC member Robert Jackson Jr. recommended that investors use BrokerCheck, a database maintained by Finra that contains the disciplinary background of brokers and that connects to a similar SEC database of investment advisers.

When researching financial professionals, investors should ask: "Is this the person we want to trust with our financial future?" Mr. Jackson said.

The town hall was the first such event that the SEC has hosted outside of its Washington headquarters.

"It's a pleasure to be outside Washington, D.C., and hear what's important to you all," said SEC commissioner Hester Peirce.


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