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SEC to require brokers only to reveal financial conflicts

Andrew Harnik, Associated Press

The U.S. Securities and Exchange Commission, based in Washington, announced this week new regulations requiring brokers act in their clients' best interest. 

If you invest with a stockbroker, he or she is on notice that any advice must be in your best interest.

That may sound unremarkable, but until now brokers only had to recommend “suitable” investments. That’s a lower and more malleable guideline than the new best-interest rule that the Securities and Exchange Commission adopted Wednesday.

Boiled down, the 771-page rule says brokers can’t put their own financial interests ahead of a customer’s needs. They must disclose conflicts of interest, although it’s unclear how far they must go in reducing them.

Consumer advocates complain that the new regulation is weaker than a fiduciary rule that the Labor Department wrote under President Barack Obama. That rule, which applied only to retirement accounts, was thrown out by a court last year.

Carter Dougherty, communications director at Americans for Financial Reform, says that even the new rule’s title is misleading.

“By calling this Regulation Best Interest, (Chairman) Jay Clayton and the SEC have gone full Orwell on us,” Dougherty said. “This regulation does not require your broker to act in your best interest the way a doctor or lawyer does. You still need to treat your broker as a used-car salesman who might pull a fast one on you.”

The brokerage industry supports the proposal and argues that it strengthens investor protection. “Compliance with the rule will not be easy for the industry,” says a statement from Kenneth Bentsen, chief executive of trade group SIFMA. “The costs to implement will no doubt be significant.”

Jasmin Sethi, associate director of policy research at Morningstar, says the rule improves on the status quo. Under the suitability standard, brokers can recommend a high-cost investment over a low-cost one, even if the only advantage is a higher commission for the broker.

Sethi said the final regulation improved upon the SEC’s initial proposal, made last year. For instance, it clarifies that the best-interest standard applies to advice given when someone rolls money into an Individual Retirement Account.

That’s a vulnerable time for investors, the Government Accountability Office found in a 2013 report. It said brokers often pitched IRA products as “free,” when they really would cost an investor more than his or her workplace retirement plan.

The rule also prohibits contests or bonuses tied to the sale of specific products. You don’t want to buy an annuity from a broker who’s more excited about winning a Caribbean cruise than meeting your retirement goals.

Other provisions, such as the requirement to mitigate conflicts of interest, are vague. A firm must disclose that it receives revenue-sharing payments for selling a certain mutual fund, but it doesn’t have to stop taking the money.

“A lot will depend on enforcement,” Sethi says. “The key is, will they be tough in going after companies that disclose but don’t mitigate?”

Another point that’s not clear: Can brokers call themselves “financial advisers?” Critics say this common title is confusing, because registered investment advisers are subject to a fiduciary standard and brokers are not.

Regulation Best Interest almost resolves the issue, but not quite. Page 148 says it “would presume” use of this title “to be a violation,” but page 158 backtracks, saying that “we are not expressly prohibiting the use of these names and titles.”

That’s the kind of maddening gray area the SEC created by responding to the brokerage industry’s pleas for flexibility. Investors have have gained some new protections, but it will be a while before we know if the brokerage industry is truly acting in their best interests.

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