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The SEC Wants Wall Street to Treat Clients Better. What’s at Stake?
Bloomberg; April 23, 2018, 6:39 AM EDT
Wall Street is known for making money by selling risky investments with complicated names. Some examples: equity indexed annuities, structured notes and leveraged inverse exchanged traded funds.
The days of marketing such products aren’t necessarily coming to an end. But things could get more challenging if regulators require financial firms to make sure whatever they are peddling is in their clients’ interests.
Last week, the U.S. Securities and Exchange Commission took the first step by proposing a new "best-interest" standard for brokers. At a high level, the strictures – laid out in hundreds of pages of text – are designed to root out sales practices that investor advocates say encourage firms to steer customers into inappropriate investments that boost broker compensation.
While the SEC has long been urged to do more to address broker misconduct, the issue started boiling over in 2016 when Barack Obama’s Labor Department approved tough conflict-of-interest rules. The pressure for SEC Chairman Jay Clayton to do something increased last month when a federal appeals court struck down the Labor regulations, putting them in legal limbo.
If the SEC’s plan takes effect, brokers would be required to disclose and mitigate a range of conflicts. Brokers would also be prohibited from using titles that give customers the impression that they have a fiduciary duty – the requirement that they put clients’ interests ahead of their own. Investment advisers have long had a fiduciary duty, and the Obama-era rules sought to extend that obligation to brokers who handle retirement accounts.
But there is a lot of confusion about what the SEC’s regulations would actually require, and the head-scratching isn’t just happening on Wall Street. At the SEC’s April 18 meeting, Republican and Democratic commissioners expressed concern that the agency had left things too vague by failing to make clear what a best interest means.
Here are some key questions about the SEC’s proposal...
April 30 Deadline Looms for DOL Fiduciary Appeal
ThinkAdvisor | April 20, 2018 at 11:00 AM
With the April 30 deadline looming for the Labor Department to appeal the 5th Circuit Court of Appeals ruling vacating Labor’s fiduciary rule, the former head of Labor’s Employee Benefits Security Administration is surmising that Labor will not appeal.
“While we don’t officially know the DOL is not going to appeal,” it looks as if the department will not, so the 5th Circuit ruling will go into effect on May 7 and vacate the rule, said Brad Campbell, former head of EBSA who’s now a partner with Drinker Biddle and Reath in Washington, on a Thursday webcast by the law firm.
“With that opportunity, the SEC now no longer has to adjust itself to fit what DOL has already done. The SEC can now lead the way [with its standards of conduct proposal] and have DOL adjust itself to the SEC’s rule.”
Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, told ThinkAdvisor that “if it was an easy decision [to appeal], the DOL would have made the decision by now and would have announced it. As result, I see it as a toss-up, perhaps leaning towards not challenging the court’s decision.”
The U.S. Court of Appeals for the 5th Circuit voted 2-1 on March 15 to vacate the Labor Department’s fiduciary rule.
Early fault lines form over SEC’s Regulation Best Interest
BenefitsPRO | April 20, 2018 at 05:53 PM
In the immediate aftermath of the Security and Exchange Commissions’ released proposal for a best interest standard, lines are being drawn over whether the regulation goes far enough to enhance the suitability standard broker-dealers currently operate under.
The tension will surprise no one at the SEC. At the end of this week’s open forum vote to release the proposal to the public, Chairman Jay Clayton insisted the proposal extends brokers’ duties to clients beyond the suitability standard, after Commissioner Kara Stein argued the proposal merely reiterates FINRA’s suitability standard.
In its proposal, the SEC goes to some length to explain how its rule would enhance suitability rules.
Regulation Best Interest, the part of SEC’s 1,000-page proposal that addresses brokers’ sales practices, is defined by new Disclosure, Care, and Conflict of Interest Obligations.
The Care Obligation requires brokers to have a “reasonable” basis to believe an investment would be in the best interest of “at least some retail customers,” have a reasonable basis to believe a recommendation fits a specific retail customer’s investment and risk profile, and a reasonable basis to believe a recommendation is “not excessive” for a specific customers’ needs.
The SEC says it is not defining “best interest,” but rather creating “minimum professional standards that encompass and go beyond a broker-dealers existing suitability options,” according to the proposal.
Lifting language from FINRA?
“Regulation Best Interest is designed to make it clear that a broker-dealer may not put her or her firm’s financial interests ahead of the interests of her retail customer,” says the SEC.
Barbara Roper, director of investor protection at the Consumer Federation of America, says the idea that the SEC has created a rule that prevents brokers from putting their interest first “is frankly misleading.”
One component of the Care Obligation potentially mitigates conflicts by requiring brokers base a recommendation on a client’s specific needs, Roper said in an email.
But other conflicts can be addressed through mere disclosure, she added.
“They (conflicts) don’t even have to be managed to ensure they don’t influence recommendations,” Roper said. “Since best interest is undefined, it will be impossible to enforce, certainly not at the level it needs to be enforced to deserve the best interest label.”
In a footnote in the proposal, the SEC acknowledges that components of its Regulation Best Interest “reflect(s) obligations” brokers have under FINRA’s suitability standard.
To Roper, that is proof the SEC did what CFA urged them not to do—simply rebrand suitability as a best interest standard “and pretend they’ve done something meaningful to protect investors.”
“Suitability has imposed only very limited restrictions on brokers’ ability to put their interests ahead of customers’ interests,” Roper added.