Your lawyer can’t take money from your opponent to give you bad legal advice. If you’re on Medicare, your doctor can’t take kickbacks from drug manufacturers for prescribing their drugs. But, under current law, your broker-dealer can receive monetary rewards and other perks for recommending certain investment products, even if those products aren’t in your best interest.
Each year, Americans lose billions of dollars because of brokers who are looking out for their own financial interests instead of their clients’. The Securities and Exchange Commission recently proposed a new set of rules, supposedly to address this problem — but the SEC has fallen far short of giving American families the protection they need and deserve.
The SEC’s proposal claims to address the broker conflict-of-interest problem by stating that brokers must act in the “best interest” of their clients. But the proposal doesn’t define what that means, creating confusion for investors and brokers and leaving the possibility that judges and corporate lawyers will chip away at the standard over time. Instead of eliminating many of the worst conflicts, the proposal only requires brokers to mitigate and disclose them. So, for example, harmful practices like quotas for the sale of in-house products or contests for hitting certain sales thresholds could continue, even though they encourage brokers to push subpar products so they can collect their rewards from the companies selling them.
The proposal has another problem: If a broker violates the best-interest rule, there is no explicit authorization for investors to sue brokers in court. If the people who get hurt can’t sue, the odds of these standards being enforced drop sharply.
The SEC can fix its flawed proposal before it issues its final rule. The Commission should make four main changes:
First, the final rule should make absolutely clear that all financial professionals must act in their clients’ best interest by applying a fiduciary standard to the brokerage industry. That is what the Department of Labor did with its 2016 rule requiring all financial professionals giving advice on retirement-savings plans to put client interests ahead of their own. Corporate lawyers representing the financial-services industry persuaded a federal court to strike down this rule on technical grounds earlier this year.