Regulators next week are set
to propose stricter rules aimed at preventing biased advice from skewing
recommendations that stockbrokers provide to their clients.
The proposal from the
Securities and Exchange Commission could
eventually replace the Labor Department’s “fiduciary rule,” a
regulation that required brokers handling retirement accounts to always put
their clients’ interest ahead of their own financial gain. A federal appeals
court invalidated
Labor’s measure in March, ruling the government overreached its
authority to regulate products such as individual retirement accounts. The
government could appeal the decision.
The SEC’s plan would impose
a new duty on brokers who advise retail customers on investments. The regulator
hasn’t disclosed yet what that will involve—whether brokers will just have to
disclose all conflicts of interest or whether they will effectively be
forbidden from recommending certain investments that pay them more but aren’t
better for their clients.
The SEC’s proposal will
include a new disclosure intended to shine more light on whether a financial
adviser is just a salesman or has a duty of loyalty to a client. The written
disclosure would clarify the differences between brokers and investment
advisers, who have a duty of loyalty to customers. It also could require
brokers to explain how conflicts of interest, such as sales commissions, can
affect a broker’s recommendations.
“A major goal of this
initiative is to address investor confusion and lack of clarity about the
services they receive from investment advisers and broker-dealers,” Paul
Cellupica, the SEC’s deputy director of investment management, said at a
compliance conference on Thursday.
Investment advisers, who
charge fees based on an investor’s assets instead of levying sales commissions,
also would have to provide the document to customers, according to an SEC
notice posted late Wednesday.
Consumer groups said they
hope the proposal doesn’t depend too much on new disclosures. Many mom-and-pop
investors don’t understand the legal difference between brokers and investment
advisers, said Barbara Roper, director of investor protection for the Consumer
Federation of America.
Under current rules, brokers
must give advice that is “suitable” for clients, meaning it fits their goals
and risk tolerance. A new standard should ensure that brokers don’t have as
much leeway to sell higher-fee products that are “suitable” when cheaper or
simpler alternatives would serve the same goal in the investor’s portfolio, Ms.
Roper said.
“If the enforcement is based
on the harm and not just the failure to disclose, you can prohibit the practice
and not just the failure to disclose it,” she said. “That starts to give you
the kind of standard you can use to change harmful practices.”
The new standard might
restrict the sale of more complex products, such as harder-to-trade real-estate
investment trusts and variable annuities, according to a research note from
Cowen Washington Research Group’s Jaret Seiberg.
The SEC’s plan also could
curb the practice of brokers referring to themselves as “financial advisers,” a
term that makes them sound like investment advisers, when they are paid to sell
products. SEC Chairman Jay Clayton said in February that the rule would address
brokers’ ability to use titles such as “financial adviser.”
The SEC also plans to issue
an interpretation that clarifies the rules that apply to investment advisers,
who have a fiduciary duty that is stricter than the one brokers currently face.
Some critics say regulators haven’t sufficiently clarified what that duty
allows and what it forbids, giving advisers flexibility to sell expensive
in-house products or services as long as conflicts of interest are disclosed.
Karen Barr, president of the
Investment Adviser Association, said advisers’ duties are spelled out by case
law, but the SEC proposal could help by documenting them in a single place.
Dean Pinto, a managing
director in Morgan Stanley’s legal department, said at an industry event
Thursday that the bank could make changes to how advisers work with clients “if
the SEC rule comes out less restrictive than the DOL rule” on certain trades.
“I wouldn’t want to see a rule that comes out that limits choice or stifles
innovation, which was one of the drawbacks of the DOL rule,” he said.
If the SEC approves the
proposal next week, it would be subject to at least two months of public
comment. The regulator would vote to finalize the rule after studying those
comments. Cowen’s Mr. Seiberg wrote Thursday that he expects the SEC to finish
the process by the end of 2018.
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