SEC commissioner Stein suggests Congress address differing broker, adviser standards

She said lawmakers may have to change 'solely incidental' language that lets brokers give advice

Oct 16, 2018 @ 2:11 pm

By Mark Schoeff Jr.

Securities and Exchange Commission member Kara Stein said Tuesday that Congress may have to get involved in raising investment advice standards.

The Democratic commissioner suggested amending securities laws that allow brokers to provide advice without registering as investment advisers as long as the advice is "solely incidental" to their sales recommendations.

"The commission must address the differing standards of conduct applicable to investment professionals and do so in a way that protects investors," Ms. Stein said in a speech at the Brookings Institution in Washington. "This is our mission. This may require action from Congress, but the consequences are too large for us not to get this right."

In a Q&A session following her remarks, Ms. Stein said the financial world has changed since the 1930s and '40s when securities laws were written that govern brokers and investment advisers.

Today, it may be necessary to revisit the laws to ensure advice from brokers — who are held to a suitability standard that many assert is weaker than advisers' fiduciary duty — is given in the best interests of customers, according to Ms. Stein.

She said the "solely incidental" language was for a less-complicated investing atmosphere that "is very different from the one we live in now. So, that's why I say we might need congressional action that would change the underlying statute."

The SEC is working on an advice reform proposal package that keeps broker and adviser regulation separate but requires brokers to act in the best interests of their clients. SEC chairman Jay Clayton asserts that the so-called Regulation Best Interest is a stronger broker standard than suitability.

The SEC is reviewing thousands of public comments on the proposal, and Mr. Clayton has not set a deadline for releasing a final rule.

Ms. Stein voted against releasing the proposal for comment, arguing that it simply maintains the broker status quo.

In her Brookings appearance, she said strengthening investment advice rules is crucial to protecting retirement savers from conflicts of interest that diminish their returns.

Most customers assume investment professionals put customers' interests first, Ms. Stein said. The SEC should concentrate on making that a reality in the marketplace.

"We can raise the duty for all investment professionals so that it meets investor expectations," she said. "Or, we can teach investors to treat the advice that they receive from certain professionals differently. However, educating investors about complicated legal duties is quite complicated in and of itself. My guess is that it would be easier to simply require that all persons actually giving investment advice put their client's interest first."

Ms. Stein's term on the commission expired last year, and she must depart by the end of the current congressional session, which likely will conclude in December with a lame-duck session. Her replacement has not yet been nominated by the Trump administration.


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