June 05, 2019

The U.S. Securities and Exchange Commission on Wednesday approved regulations meant to heighten and clarify standards of conduct for brokers and investment advisers, despite criticism from its lone Democratic commissioner and investor groups that the rules are too weak.

Regulation Best Interest, approved 3-1, will bar brokers from putting their own financial interests above those of their clients, requiring them to act in their clients’ best interests. SEC Chairman Jay Clayton said the new rule will “substantially enhance” broker requirements from the existing standard set by the Financial Industry Regulatory Authority, which requires that brokers' recommendations are suitable for their clients. But critics disagree.

 SEC Commissioner Robert Jackson, who voted against the regulation, said it fails to define best interest or mandate that brokers recommend a single best product.

“The core standard of conduct set forth in Regulation Best Interest remains far too ambiguous about a question on which there should be no confusion,” he said in a statement. “As a result, conflicts will continue to taint the advice American investors receive from brokers.”

Regulation Best Interest, or Reg BI, requires brokers to identify and “at a minimum disclose” all conflicts of interest, and mitigate conflicts that encourage those connected to the broker to put their or the firm’s interests ahead of their clients'. Brokers will have to eliminate certain compensation incentives altogether.

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Clayton anticipated that the rule would be criticized for its departure from a seemingly higher fiduciary standard imposed on registered investment advisers and emphasized the importance of preserving investors’ choice of a variety of investment services.

But Laura Posner, a partner in Cohen Milstein Sellers & Toll PLLC’s Securities Litigation and Investor Protection Group, said choice isn’t necessarily a good thing.

“I think preserving choice is a red herring,” she said. “No retail investor needs the choice of a product that’s going to cost them more or provide more risk.”

Like Jackson, Posner called out the SEC for failing to actually explain what it means by “best interest.” Investors who know their brokers must adhere to a “Regulation Best Interest” might get the false impression that whatever they’re sold is in fact the best product for them when this isn’t necessarily the case, she said.

The complete article can be accessed here.