The announcement comes months after such a move was first floated. It may leave some consumer advocates and politicians still pushing for tougher measures to prevent biased advice.
“The Securities and Exchange Commission today voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisors and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products,” the SEC said in a statement earlier this week.
“Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisors, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made,” the SEC continued.
“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” SEC chairman Jay Clayton, said. “This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisors in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”
The SEC said that under its best interest regulation, “broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer”.
“Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations,” it said.
The regulator said its Form CRS Relationship Summary will “require registered investment advisors and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional”.
Even before such rules loomed into view, there has been a shift towards fee-based advice in wealth management and away from commission-based sales payments to brokers. A similar pattern (albeit with local differences) has taken place in the UK. Pressure for higher standards increased after the 2008 financial crash, which exposed cases of poor and biased advice.
(Note: the persons quoted in this article are members of this publication's editorial advisory board. We intend to continue debate around this and other topics. As some of the responses to the SEC show, if the organization thought it had put some issues to bed, it is deeply mistaken.)