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Regulation and Compliance > Federal Regulation > SEC

SEC Advice Plan Requires Big Change in Broker Behavior: Clayton

By Melanie Waddell

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SEC Chairman Jay Clayton. (Photo: New York Law Journal)

The Securities and Exchange Commission’s standard of conduct proposal raises brokers’ advice obligations and changes the way brokers are allowed to operate today, the agency’s chairman, Jay Clayton, said Wednesday.

Responding to a question from an attendee during the agency’s first town hall, dubbed “Investing in America, the SEC Comes to You,” held at Georgia State University College of Law in Atlanta, Clayton offered the following example of how brokers’ behaviors will change under the agency’s proposed Regulation Best Interest for brokers:

“In suitability, if you come up with two investments that are suitable for your client, there are people who will argue that you’re allowed to look at which investment makes you, the broker, more money and put the client into that investment,” Clayton relayed.

“Under our new standard, you [the broker] will not be allowed to do that. You cannot put your interests ahead of your clients’ interest,” he continued, adding that the agency is “going to add to that. This is a proposal…we all have views, we want your views.”

(Related: SEC Must Clarify Advice Standards or the Courts Will: AARP)

The securities regulator, under its conduct standard for brokers, is “going to require policies and procedures so that the exercise the broker-dealer goes through to get to that place, where they’re going to make a recommendation, also reflects a duty of care that is enhanced,” Clayton said.

Clayton also told town hall attendees that the agency is “looking at our private placement rules. They can use a sprucing up.”

Noting that the commission is a government agency with limited resources, Clayton added that “We all recognize that the private placement space can benefit from technology without adversely affecting investor protection.”

When choosing a financial professional, Clayton also told attendees to ensure the broker or advisor is registered—with the SEC or the state.

If they are not a registered professional, “the risks you are taking in dealing with them go up dramatically,” Clayton warned. “They don’t have oversight, they don’t have inspection.”

Investors, Clayton continued, also need to ask what type of investment professional they’re dealing with – broker-dealer or an investment advisor.

He cited “two significant” differences between the two: the scope of the relationship, with a broker-based relationship being a “transaction-based” one and an investment advisor relationship a “portfolio-based” one.

Another crucial element for investors to probe is how their investment professional is paid, Clayton said. A broker-dealer is principally paid by commission, he said, whereas an investment advisor “generally charges you a quarterly or annual fee based on the level of assets” that they’re managing for you.

“Understanding the fees, how they are compensated, helps you understand their incentives,” Clayton said. “I believe when you understand someone’s incentives, you have a much better relationship with them.”

A goal for the commission, he continued, is to ensure retail investors “understand those fees upfront. If they can’t be presented clearly, they’re probably too complex for a retail investor.”

Clayton also warned attendees to look at the professional’s history – “have they done something wrong in the past? That’s a good indication that they might do something wrong in the future.”

This is an area where the SEC has “made strides” with the Financial Industry Regulatory Authority and the states, Clayton continued, citing the agency’s newly created website that allows investors to search a database of individuals who have been barred or suspended for breaking federal securities laws.

— Related on ThinkAdvisor

Melanie Waddell

@Think_MelanieW

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