Democratic senators want Finra to weigh in on SEC advice rule

Warren, Booker, Brown say Finra's interpretation could determine whether measure has teeth

Jul 20, 2018 @ 4:37 pm

By Mark Schoeff Jr.

Three Democratic senators are pushing Finra to weigh in on the Securities and Exchange Commission's investment advice reform proposal and explain whether the measure will strengthen broker requirements.

Sens. Elizabeth Warren, Mass., Cory Booker, N.J., and Sherrod Brown, Ohio, said in a letter Friday to Financial Industry Regulatory Authority Inc. CEO Robert W. Cook that the regulator's interpretation of the SEC's proposal will be crucial in determining whether it protects investors.

"Whether or not it will fulfill the SEC's stated goal of raising the standard of conduct for broker-dealers may depend largely, if not almost entirely, on the way that Finra interprets the rule and applies it in its disciplinary actions and arbitration proceedings," the senators wrote. "In other words, billions of dollars in middle-class Americans' hard-earned savings — which families need to buy a house, send a child to college, or retire in old age — may depend on how you understand and implement the SEC's rule."

Mr. Brown is the highest-ranking Democrat on the Senate Banking Committee. Ms. Warren also is a member of the banking panel.

Under the SEC proposal, which is open for comment until Aug. 7, brokers would be required to act in the best interests of their clients. They would have to implement policies and procedures to disclose and mitigate conflicts of interest.

SEC chairman Jay Clayton has asserted that the proposal would be stronger than the current suitability standard that governs brokers. Under suitability, brokers must take into account their clients objectives and risk tolerance but can recommend products that give the brokers the highest revenue.

The Democratic senators expressed skepticism that the SEC proposal would achieve what Mr. Clayton promises.

"Despite its title implying a much more stringent standard, this proposal is unlikely, for several reasons, to give investors the peace of mind they deserve that the advice they are receiving is truly in their best interests," the senators wrote. "For example, the proposal does not explicitly prohibit the most egregious sales practices that clearly incentivize brokers to put their own interests ahead of their clients, such as sales quotas and contests."

They asked Finra to respond by Aug. 3 to a series of questions that include how the SEC's proposal would differ from current broker rules, what actions would be prohibited, how Finra would define mitigating conflicts and whether the SEC's proposal would create similar requirements for brokers as the Department of Labor's fiduciary rule.

The SEC declined to comment.

Finra spokesman Ray Pellecchia said Finra has "received and will review the letter."

Mr. Cook told reporters at Finra's annual conference in May that the regulator likely would have a role in enforcing a new SEC rule on advice standards for brokers. He said Finra did not have a position on the SEC's proposal.

The senators noted that the SEC's reform measure does not include a provision to allow an investor to sue a broker if the investor believes that a broker did not act in their best interest.

"Investors who have been cheated by broker-dealers will have to either rely on the SEC or Finra to enforce the rule, or file a private claim most likely in Finra's arbitration forum," the senators wrote. "This means that Finra will play a large role in implementing and enforcing the rule. Yet neither Congress nor the public has heard from Finra about its views on the SEC's proposal."


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