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Regulation and Compliance > Federal Regulation > SEC

Wall Street Sees a Win in SEC Crackdown on Broker Conflicts

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SEC chairman Jay Clayton SEC chairman Jay Clayton. (Photo: Diego Radzinschi/ALM)

Wall Street is finally getting tougher rules that crack down on industry conflicts of interest. Bankers are hardly sweating it.

The U.S. Securities and Exchange Commission is poised to approve new requirements next week for selling stocks, bonds and other assets after brokers fended off the government’s attempts to restrict shady practices for almost a decade. But investor advocates are concerned the regulations fall short of what’s needed to prevent firms from taking advantage of clients, a worry underscored by the industry’s support of the SEC’s effort.

Among the positives for brokers: The rules are softer than Obama-era limits that they successfully sued to block, and Wall Street would rather have an SEC chief appointed by President Donald Trump set policies than take its chances with what might happen should a Democrat win the White House in 2020.

Knut Rostad, the president of the Institute for the Fiduciary Standard, said the new SEC rules will give investors a false impression that brokers are being held to higher standards.

“This is all a big runaround,” said Rostad, whose group advocates for strict codes of conduct for financial professionals. “Brokers for the first time will be able to look clients in the face and say we are required by law to put your interests first.”

Lawsuits Coming?

Already, some pro-investor groups are contemplating a legal challenge — meaning the debate could go on long after SEC commissioners vote on the rules June 5.

A spokeswoman for SEC Chairman Jay Clayton declined to comment on the specifics of the rule ahead of next week’s meeting. Clayton, a former bank lawyer appointed by Trump, has stressed that the new regulations are far from a giveaway to Wall Street and significantly raise the bar for brokers.

Clayton thrust himself into the contentious fight over industry standards shortly after joining the agency in 2017. Last year, the SEC issued a lengthy proposal designed to curb practices like contests that reward brokers for selling as many securities as possible. The plan also required better disclosures of internal marketing agreements that can drive up fees.

Broadly, the proposal called for brokers to act in the “best interest” of their clients. Clayton has said that’s a step up from now, where brokers are only required to recommend investments that they believe are suitable. Still, it’s not as strict as what’s known as a fiduciary standard, which demands that a customers’ interests be put first.

That’s not how some opponents see it. Barbara Roper, director of investor protection at the Consumer Federation of America, says that the SEC is “mislabeling” the regulation to suggest it’s stronger than it actually is.

“The SEC is misleading investors into expecting brokers to recommend the investments that are best for them, but its rule doesn’t require that,” she said. “That’s going to do real financial harm to vulnerable investors.”

The SEC’s final rule will be similar to the proposal, but it will include some changes that benefit financial firms, according to people familiar with the matter. For instance, brokers will probably get more leeway in informing clients of certain conflicts, said two of the people who asked not to be named in discussing internal SEC deliberations. A key tweak is that disclosures won’t necessarily have to be in writing, the two people added.

Industry Lobbying

The revisions come after the Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, urged the SEC in an August letter to make clear that brokers shouldn’t have to notify clients of conflicts each time they make a trade on their behalf.

An issue being watched closely by investor advocates is whether the SEC asserts that its best-interest standard preempts any similar regulations adopted by states, which started proposing stepped-up requirements on brokers after the Obama administration ’s rules were overturned in 2018. Sifma has called for a uniform federal standard, arguing that proposals like one recently issued by Nevada “would result in an uneven patchwork.”

The SEC vote will also touch on investment advisors, money managers who compete with brokers and operate under the more stringent fiduciary standard. Many consumers aren’t aware of the difference, and investor advocates have long contended that the two should be subject to the same code of conduct.

Advisor Breaks?

In a fresh twist to the years-long fight, some are now concerned that the SEC might actually weaken the fiduciary obligation for investment advisors as part of the new rules for brokers. Those worries stem from additional guidance that the SEC is expected to also approve next week, which clarifies the responsibilities money managers have to their clients and re-defines the standard.

“The objective of the commission’s work in this area is to reaffirm, and in some cases clarify, the existing federal fiduciary duty owed by investment advisors to their clients, reflecting how the commission and SEC staff have inspected for compliance and interpreted and enforced the law in this area for decades,” Clayton’s office said in an emailed statement.

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