SEC to Propose Stricter Broker Standards

April 13, 2018 — 11:47 AM EDT

The Securities and Exchange Commission (SEC) is gearing up to propose the brokerage industry be subjected to stricter standards that would provide retail investors with better transparency about why the stockbroker is recommending a particular investment product.

According to a report in The Wall Street Journal, under the new rules, brokers who recommend stocks to individual investors will have to provide greater clarity as to any conflicts they may have. Many brokerages get a commission for recommending a particular stock, and the SEC wants investors to know if that is the case. The Wall Street Journal noted that the SEC hasn't said what the rule will encompass and whether brokers will have to disclose the conflicts of interest or if they would be barred from recommending investments that make the firm more money but are not in the best interest of clients. Down the road, the rules could replace the fiduciary rule that requires brokerages that handle retirement accounts to put their clients' interest ahead of their own.

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In late November, the Department of Labor (DOL) announced that it was delaying implementation of its enforcement mechanism until the middle of 2019. Enforcement for violating the fiduciary standard was supposed to go into effect on Jan. 1, 2018. In June, the DOL implemented two rules that expand the number of financial advisers that are considered fiduciaries and set standards for conduct. Supporters of the delay said that it provides more time for the DOL to conduct a deep-dive review of the rule, while critics fret that the delay is the death knell for the regulation. In March, a federal appeals court ruled that the government doesn't have the authority to regulate things like individual retirement accounts. That ruling could be appealed.

The SEC's new proposal would include a written disclosure that would provide the clear difference between brokers and investment advisers who have to subscribe to the fiduciary rule. The Wall Street Journal noted that the SEC could make brokers explain how conflicts of interest can affect their recommendations. "A major goal of this initiative is to address investor confusion and lack of clarity about the services they receive from investment advisers and broker-dealers," said Paul Cellupica, the SEC's deputy director of investment management, during a conference that was covered by the paper. The new rule may also prevent brokers from selling complex investment products such as REITs and variable annuities, Cowen Research Group wrote in a recent note. It could also stop the practice of brokers calling themselves financial advisers.

While the rules have a lot of critics, one firm that is in favor of them is TD Ameritrade, the Omaha, Nebraska-based discount brokerage. Near the end of 2017, Skip Schweiss, TD Ameritrade Holding Corporation (AMTD) institutional managing director, said that the fiduciary standard should not be weakened. Schweiss noted that he is hoping for a rule that extends the fiduciary standard so that there is good investor protection across the board.

"A lot of us believe that the most vulnerable investors out there are in retirement plans and have very low levels of investing sophistication," said Schweiss in an interview with Financial Advisor. "If they do a rollover, they'll be exposed to IRA land, where the protections aren't nearly that strong. So they are vulnerable to the investment advice they get. There are a lot of critical decisions for new retirees. Protecting this type of investor is exactly what the DOL is trying to accomplish with this rule. Where they're having problems is with the enforcement mechanism."