SEC advances new broker standards: What you need to know

By FeaturesFOXBusiness

The Securities and Exchange Commission (SEC) voted to advance a new rule that would impose tighter restrictions on stockbrokers and likely bring some benefits to investors if implemented.

The commission voted 4-1 in favor of the rule, which aims to prevent stockbrokers from giving conflicted investment advice to customers.

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The rule is viewed as less stringent than the Labor Department’s Fiduciary Rule, which aims to regulate conflicts of interest among brokers giving retirement advice.

The current law requires commission-based brokers to give advice that is “suitable” to the investor but that doesn’t necessarily mean it has to be in her best interest.

“These rules appear to be far more respectful of investors’ ability to make informed decisions than the rules finalized in 2016 by the Obama Department of Labor,” John Berlau, a senior fellow at the Competitive Enterprise Institute, told FOX Business. “Those rules, recently overturned by a federal appeals court, directly limited investors’ options and treated investors as too stupid to make their own decisions about retirement.”

The Labor Department’s Fiduciary Rule was overturned by a court in March, and its future remains unclear.

The one SEC commissioner who voted against the agency’s proposed provision, Kara Stein, said it would be more apt to call the rule "Regulation Status Quo" instead of "Regulation Best Interest," as it has been named. Stein, a Democrat, criticized the rule for failing to define “best interest” and also for not doing enough to change the current landscape regulating brokers.

While the SEC’s proposal may not be perfect, it does contain some positives for investors, Chris Carosa, co-founder of Carosa Stanton Asset Management, told FOX Business.

“The idea is that they want to scale back the DoL's [Fiduciary Rule]," according to Carosa, who added that the SEC is choosing to regulate brokers within the suitability framework – as opposed to the Fiduciary one. “That’s actually OK as long as investors know the person they’re dealing with is a broker as opposed to an adviser.”

One of the topics the SEC seeks to address is job title discrepancies.  An investment adviser is someone who is legally registered with the SEC to provide fiduciary investment advice, so brokers don’t necessarily have to be advisers. Brokers also earn commission, while advisers are paid a fee based on a certain percentage of clients’ assets – which some believe provide different incentives to each class of professionals. Brokers, however, can have dual titles, which can make it confusing for clients to know which hat the professional is wearing at any particular time, Carosa said.

Another main complaint detractors have about the SEC’s rule is that it relies heavily on broker disclosures. It aims to require brokers to reveal whether they are acting in the best interest of clients or simply as salespersons. For example, they would be required to tell clients if they receive a bonus for selling a certain product. But sales contests or prizes brokers receive for selling certain products might be untouched by the rule, as reported by The Wall Street Journal.

Carosa said the enhanced disclosure provision helps regulators and industry more than it helps investors.

On the other hand, Berlau said enhanced disclosures could give investors the freedom to educate themselves more fully on their available choices.

The SEC’s rule is up for public discussion for 90 days before it would be formally voted on.