SEC advice rule seeks to tighten reins on brokers

The proposed rule puts new restrictions on brokers, but it is still unclear how strongly the SEC is clamping down

Apr 18, 2018 @ 7:17 pm

By Greg Iacurci

The Securities and Exchange Commission appears to be cracking down on broker conduct in its investment-advice overhaul by pushing for a best-interest standard that compels brokers to put clients' financial interests ahead of their own, requires them to mitigate financial conflicts and prevents brokers from using the terms "adviser" or "advisor" to describe themselves.

This is according to an overview of the proposal's contents published Wednesday evening by SEC Chairman Jay Clayton and a fact sheet the SEC released Wednesday afternoon. Both outlined, in broad contours, the contents of proposed rule, which hadn't yet been publicly released as of early Wednesday evening. Experts stress, however, that it's too early to tell — absent specific regulatory language — to what extent the SEC is clamping down.

Mr. Clayton said the SEC's objectives are to "enhance retail investor protection and decision making," preserve access to a "variety" of types of investment products and services, and raise investor awareness.

"It has long been recognized that many investors do not have a firm grasp of the important differences between [broker-dealers] and [investment advisers] — from differences in the variety of services that they offer and how investors pay for those services, to the regulatory frameworks that govern their relationship," he wrote in the proposal overview, adding that the confusion "could cause investor harm."

The SEC voted 4-1 to release the proposal late Wednesday afternoon. Democrat Kara Stein was the sole commissioner to vote against releasing it, saying it maintains the status quo instead of strengthening current advice standards.

But even those commissioners who supported releasing the rule acknowledged that it needs more work. For example, Republican commissioner Hester Peirce said that the part of the proposal requiring brokers to act in the best interests of their clients is mislabeled.

"It would be better to say we're proposing a suitability-plus standard," Ms. Peirce said, referring to the current rule that governs brokers' recommendation to clients.

The proposal will total more than 1,000 pages and will have a 90-day comment period. SEC commissioners held a hearing on the proposal Wednesday afternoon, with Republicans and Democrats at loggerheads over its contents.

Mr. Clayton's overview highlights two broad rule-making goals: raising and clarifying standards of conduct for broker-dealers and investment advisers; and providing clarity regarding fees, conflicts and "other material matters."


"Our proposed rule and interpretation would impose common principles across the spectrum of relationships, while applying specific regulatory obligations that reflect the differing relationship types," Mr. Clayton said. "In other words, while the type of advice provided, whether episodic or ongoing, may be different, the obligations to the investor should embody common best interest principles."

This entails imposing a "best interest" duty on brokers, which includes a disclosure obligation, a care obligation and two conflict of interest obligations.

Mr. Clayton said the rule will prohibit broker-dealers from putting their interests ahead of their customers' interests.

'"The establishment of policies and procedures to mitigate or eliminate material conflicts arising from financial incentives is perhaps the most critical enhancement over existing standards applicable to B-Ds," Mr. Clayton wrote. "It means that B-Ds must do more than simply disclose their conflicts of interest."

He goes on to say that certain "inherently risky sales practices," such as contests, trips and prizes, will "merit scrutiny."

The SEC will also provide an interpretation as to what it believes an investment adviser's fiduciary duty entails and if current market conduct falls below this threshold.


This section includes a two-pronged approach, including title reform for brokers.

"We want investors to understand who they are dealing with, i.e., what category — IA, B-D, or dual-hatted — their investment professional falls into and, then, what that means and why it matters," Mr. Clayton said.

Brokers are currently allowed to describe themselves as an "advisor," even though they operate under a less stringent "suitability" standard when compared with registered investment advisers, which operate under a fiduciary standard.

The rule would restrict "standalone BDs and their financial professionals" from using the terms "adviser" and "advisor" as part of their names or title, "which are so similar to 'investment adviser' that their use by a standalone B-D may mislead the B-D's prospective customers," the outline says.

There's also a disclosure element that will highlight for investors — in a standardized, 4-page-maximum form — services, legal standards, customer fees and conflicts that may exist. Mr. Clayton's outline included examples as to what such disclosures could look like.


Legal experts who viewed the SEC's fact sheet were mixed on their reactions to the proposal's outlined contents.

"I think the standards themselves are significant, and they would advance the customer's best interest," Andrew Oringer, partner at the law firm Dechert, said after reviewing the SEC's proposal outline.

Barbara Roper, director of investor protection at the Consumer Federation of America, said the "biggest step forward" in strengthening an advice standard appears to be the requirement to mitigate financial conflicts.

"Properly implemented, that could truly help to change harmful practices," she said. "But I'm not sure what types of non-financial incentives might still be tolerated, so I can't yet tell whether there are significant loopholes here."

Ms. Roper was initially skeptical of the SEC's approach to title reform, given the language included in the SEC's fact sheet.

"If you crack down on one title and not others, you aren't going to really solve the problem," she said. "And it has to apply to marketing and advertising, not just titles. I can't tell from this whether it takes any steps along those lines."

The SEC's advice proposal marks a significant milestone in the movement to reform investment-advice standards. The Dodd-Frank financial reform law in 2010 gave the SEC authority to promulgate a regulation on financial advice. The Department of Labor, though, beat the SEC to the punch by promulgating its fiduciary rule, which went into effect last June.

The Fifth Circuit Court of Appeals dealt a blow to the rule in March by vacating it. The DOL has until April 30 to decide whether to appeal. Meanwhile, the rule is also undergoing a review at the request of the Trump administration.


What do you think?

View comments

Recommended next

Upcoming event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print