How do you know your stockbroker has your best interests in mind when making investment recommendations? Last week, the U.S. Securities and Exchange Commission voted in favor of a package of rules intended to provide investors with that peace of mind in their dealings with broker-dealers. Some consumer advocates, however, say the new protections aren’t strong enough.
The centerpiece of the reforms is “Regulation Best Interest,” commonly known as “Reg BI.” The SEC claims the awkwardly named measure “substantially enhances the broker-dealer standard of conduct.” Previously, broker-dealers were simply required to recommend investments deemed “suitable” for their clients, taking into account characteristics such as an investor’s age and risk tolerance. The new rules call for broker-dealers to provide clients with specific disclosures about fees, the capacity in which they are acting, and whether they provide ongoing monitoring of account performance.
Additionally, Reg BI mandates that broker-dealers “exercise reasonable diligence, care and skill” when advising their clients. They also “must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest.”
Regulation BI imposes new duties on brokers but stops short of the fiduciary standard that applies to registered investment advisors. “This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost,” said SEC Chairman Jay Clayton.
Only one of the four SEC commissioners, Robert J. Jackson Jr., an independent who fills one of the Commission’s Democratic seats, opposed the new regulations. Reg BI “relies on a weak mix of measures that are unlikely to make much difference in improving the advice ordinary Americans receive from brokers,” according to Jackson.
“Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice,” Jackson said.
Members of the financial services industry hailed the SEC’s vote as a win for consumers and a pragmatic approach to regulating brokers. Conversely, the Consumer Federation of America, an association of non-profit organizations, charged the Commission with putting investors at risk.
“Now, more than ever, investors will need to be on their guard against brokers and advisers who seek to profit unfairly at their expense,” said Barbara Roper, the CFA’s director of investor protection.
The SEC’s decision came in for criticism from the AARP, one of the more powerful lobbying voices in the United States. The organization argued that the ambiguous definition of best interest might give investors a false sense of security about the motives of financial professionals. Additionally, it asserted that the disclosures required under Reg BI could actually confuse investors.
Industry observers seem confident that legal challenges to Reg BI are coming. Equally important, states may step in to address some of the issues raised by critics and create their own standards of conduct, a move that would not be preempted by the SEC regulations.
In that sense, Reg BI might become the equivalent of a regulatory floor established at the federal level, with states layering on their own measures. That kind of unwieldy patchwork might not be in the best interest of brokers and investment advisors, but it appears increasingly likely.