The SEC is poised to deliver a victory to business groups by adopting rules for financial advisers aimed at curbing conflicts of interest but stopping short of a stricter Obama-era regulation that the industry successfully challenged in the courts.
The so-called best interest regulation, which the SEC is expected to approve on Wednesday, also represents a personal triumph for Chairman Jay Clayton, a President Donald Trump appointee who vowed to come up with his own regulation after President Barack Obama’s “fiduciary rule” was tossed. Clayton says the new regulation will benefit consumers.
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But if the SEC adopts the rule without changes from the original proposal, it will put Clayton in the crosshairs of House Democrats, who see it as toothless; key state regulators, who are promoting stricter standards in their own jurisdictions; and investor advocates.
The SEC rule is expected to require brokers to act in the best interest of their clients, including by mitigating — and possibly eliminating — conflicts involving how they are paid for investment recommendations they make. The current standard is to merely ensure that the investments are suitable for their clients.
Brokerage businesses and insurance companies support the SEC best interest effort, partly because the regulation drawn up by Obama’s Labor Department opened up the prospect of litigation if customers didn’t believe a fiduciary standard of care had been met. The SEC regulation does not.
Thomas Quaadman, an executive vice president at the Chamber of Commerce, said one reason his group sued the Obama administration was because the Labor Department is not the primary regulator for the financial industry.
“We need to have updated, modern rules for investors and businesses so that investors know what the rules of the road are,” Quaadman said in an interview. “Businesses have to have the ability to provide retirement products,” he said. “We think the SEC is in a position to deliver on both.”
The Insured Retirement Institute, which joined with the Chamber in suing to stop the fiduciary rule, said the best interest regulation “will have substantial enforcement teeth including investigatory powers and civil and criminal penalties to ensure compliance with SEC” rules and requirements of the Financial Industry Regulatory Authority.
“IRI has long supported the principle that financial professionals should be required to act in their clients’ best interest,” said Jason Berkowitz, IRI’s chief legal and regulatory officer.
But the SEC’s rule is almost certain to draw criticism.
In March, Rep. Carolyn Maloney (D-N.Y.), chair of the House subcommittee that oversees the agency, said that while the SEC’s effort may be better than the status quo, “it is still far too weak, and I still have several serious concerns with the rule.”
States aren’t likely to be happy with the final rule either if it jeopardizes their efforts to write their own laws for financial advice. In April, New Jersey proposed a regulation that would apply a fiduciary obligation to brokers and other sales agents. That would likely be a tougher standard than the one the SEC is considering.
Andy Green, managing director of economic policy at the Democratic-leaning Center for American Progress, said he’s worried that the SEC will deliver a “sham best interest” requirement for the financial industry.
“For middle class families, will their savings for retirement go to benefit them, or in a secret, hidden way to those providing financial services for them?” said Green, a former staffer for Democratic SEC Commissioner Kara Stein. “Will the SEC deliver for those who wanted it to be at the table with the DoL and do something favorable to protect investors from billions of dollars in hidden fees?”
CAP on Monday, along with the Consumer Federation of America, sent a memo to members of Congress, saying “the SEC is ready to adopt a weak, new best-interest-standard-in-name-only.”
“The Commission appears poised to give firms greater flexibility to develop their own disclosures,” the memo says. “Some firms will take advantage of the greater ‘flexibility’ to sugar coat issues, like conflicts of interest, that they do not want investors to understand.”