The Securities and Exchange Commission plans to vote Wednesday on what it calls Regulation Best Interest, which says brokers can’t put their own paychecks ahead of a customer’s needs. The SEC’s proposal for the rule, issued last year, said brokers should disclose and reduce financial conflicts of interest, though it doesn’t say how to limit them.
Consumer advocates say the SEC’s proposal left room for brokers to maintain incentives that could harm less sophisticated clients. Even the brokerage industry, which has largely supported the SEC’s action, said it wanted more guidance to decide how to reduce conflicts without eliminating them altogether.
“They are being incredibly deferential to firms to decide what conflicts they should or should not mitigate,” said Micah Hauptman, financial services counsel for the Consumer Federation of America. The SEC declined to comment ahead of the final rule release.
The SEC’s plan suggested brokers could implement the best-interest standard by eliminating perks like paying disproportionately greater commissions for selling more investment products. It also said commissions should vary only for neutral reasons, such as how much time it takes a broker to evaluate an investment option.
“One alternative would be to create more bright-line rules around what sorts of conflicts cannot be tolerated in this space,” said Benjamin Edwards, a law professor at the University of Nevada, Las Vegas.
SEC officials have said they are trying to fix some compensation practices that may fuel biased recommendations. For instance, SEC Chairman Jay Clayton has said perks like sales contests, used to juice sales of specific products, wouldn’t be allowed.
Brokers are compensated in a number of other ways and disclosures are often buried in legal documents that some clients don’t read. Sometimes brokers are paid more to sell certain investments over others and may qualify for supersize commissions if they hit higher sales targets. Brokerage firms also get legal kickbacks from mutual-fund managers, which is known as revenue sharing, to reward sales of particular funds.
Mr. Clayton has said he wants to improve investor protections while preserving the ability to charge commissions, which can be a cheaper way to pay for investment advice. The alternative is charging a fixed percentage based on the value of a client’s account.
Investment advisers who charge such fixed fees work under a more strict standard of customer loyalty, known as a fiduciary duty. The SEC also plans to vote Wednesday to put its own stamp on what that means, as the standard has largely evolved from court rulings.
Brokers so far have labored under a lower standard known as suitability, which requires advice that meets a client’s goals or risk tolerance.
Many firms that serve individual investors offer both brokerage and fixed-fee accounts. They say the SEC’s plan was right to preserve both options.
“The principle that you must put your client’s best interest first when you are providing brokerage services is a major regulatory advance,” said John Taft, vice chairman of Baird.