What investors need to know about SEC's new broker standards

The Securities and Exchange Commission (SEC) voted to advance a rule on Wednesday that aims to prevent stockbrokers from giving conflicted investment advice to customers.

A vote on the final version of the rule passed 3-1 on Wednesday, as the agency seeks to help clarify the roles of registered investment advisers and broker-dealers in their relationships with customers.

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.

Because broker-dealers provide advice by recommending investment strategies or securities transactions to retail customers, the measure advanced by the SEC will require brokers to disclose major conflicts of interest. Those conflicts could include whether the broker is making those recommendations in order to maximize his or her compensation and whether financial incentives are involved. For example, they would be required to tell clients if they receive a bonus for selling a certain product.

Some perks, like contests that underpin a sale, will not be allowed under the new rule. The proposal stops short of outright banning specific sales incentives.

The best interest standard will also apply to recommended retirement account decisions.

The goal is to offer customers using a broker similar protections to those using investment advisers – who will still be fiduciaries.

However, some critics caution that putting the government in charge of deciding what is in the “best interest” of Americans is risky.

"Hopefully, the new rules will protect investors from fraud and deception but not prevent them from making the choice of which type of financial professional they wish to deal with,” John Berlau, a senior fellow at the Competitive Enterprise Institute, said in a statement. “The true 'best interest' for middle-class investors is a marketplace that provides truthful information so that investors can choose the financial professionals and strategies they believe work best for them."

Berlau added that additional regulation raises the possibility of increased costs, which would likely be passed on to the consumer.

The proposal is viewed as less stringent than the Labor Department’s Fiduciary Rule, which was overturned by a court in March.


But other critics allege the SEC’s standards don’t go far enough to protect investors.

“The only way for the financial services industry to earn trust back from Americans is to fully embrace transparency and honesty,” Jay Shah, CEO of Personal Capital, said in a statement. “Some see the Best Interest standard as a step in the right direction, but it simply creates more air cover for bad behavior.”

One main complaint detractors had about the SEC’s rule is that it relies heavily on broad broker disclosures, which may not meaningfully inform customers. Experts previously told FOX Business the rule may help regulators and industry more than investors.