Wall Street brokers spent years fending off tough conflict of interest rules that were finally imposed on them at the end of Barack Obama’s presidency.
Now officials appointed by President Trump are looking to replace those regulations with a lighter touch, and a lot of brokers are privately delighted.
The new approach will be unveiled Wednesday by the SEC. While people familiar with the matter say the agency will likely propose restrictions on how investments are marketed, it probably won’t require that brokers put their clients’ interests first, a high legal standard mandated by the Obama administration.
If the SEC’s more than 1,000-page plan goes into effect, it stands a good chance of superseding the controversial regulations approved by the Labor Department in 2016. A
The SEC proposal marks an attempt by its chairman, former big bank lawyer Jay Clayton, to address legal and regulatory uncertainties that were largely triggered by Labor’s rules. The SEC’s strictures would cover all investments handled by brokers; Labor’s only applied to retirement accounts.
Questions about potential conflicts and whether brokers should have to put clients’ interests ahead of their own ― a requirement known as a fiduciary duty ― have inflamed the industry for more than a decade.
Consumer advocates contend that long-standing guidelines, which only mandate that brokers offer “suitable” investments, can lead to customers being overcharged or steered to high-fee products. Such arguments resonated with the Obama administration, which said biased investment advice cost the public billions of dollars annually.
Another issue is that investment advisers, who generally charge clients a fee based on the amount of assets managed, must adhere to a fiduciary standard. Brokers, who earn their pay via commissions, do not. Some studies have shown investors are confused by the distinction.
Wall Street routinely argues that the SEC is the agency best equipped to handle broker regulations because it has long overseen the industry and has specialized knowledge of how firms conduct business.
SEC spokeswoman Judith Burns declined to comment.
A key aspect of the SEC’s plan creates a "best-interest” standard for brokers, said the people who asked not to be named because the regulations aren’t yet public. Such a constraint would be stricter than existing rules, which require that brokers ensure investments are appropriate for clients’ needs and their appetites for risk.
Christopher Iacovella, chief executive officer of the Equity Dealers of America, a trade association of regional brokerage firms, said it’s a "big step" that industry is willing to support a heightened standard for brokers.
“The SEC is the right place to be doing this,” Iacovella said. “We are extremely supportive of the SEC picking up the ball and running with it.”
The agency is expected to restrict ― rather than ban ― practices that investor advocates argue can encourage bad behavior, such as offering free vacations to brokers who meet sales targets, said the people.
The SEC may also expand how it defines churning, in which brokers inappropriately make money off customers by excessively buying and selling securities, one of the people said. The change could make it easier for regulators to sanction brokers for misconduct, the person said.
To address confusion over the various titles used in the financial industry, the SEC is likely to propose restrictions on how brokers describe their duties, the people said. The goal is to prevent clients from mistaking brokers for investment advisers, the people said.
The SEC’s five commissioners, including Clayton, will vote Wednesday on whether to seek public comment on the proposals. The regulations would then be amended before commissioners hold a second vote to make them binding.
Knut Rostad, president of the Institute for the Fiduciary Standard, predicts the SEC’s proposals will fall short of what’s needed to eliminate broker conflicts. He said he’s most concerned about the agency calling its new requirement a best-interest standard because that could give the false impression that brokers must put their customers’ interests first.
It’s what brokers have “wanted all along,” Rostad said. “The champagne is going to be flowing” after SEC commissioners vote, he added.
“The bottom line is that it is going to be more difficult for investors to discern who is selling a product and who is giving advice,” Rostad said.
