SEC Says Advice Plan Changes Broker Behavior

June 19, 2018 by Kevin S. Kim, Esq.

After receiving pressure from consumer advocacy groups, the Securities and Exchange Commission is attempting to define and clarify their standard of conduct proposal ahead of the cutoff date for public comment. At the agency’s first town hall, SEC Chairman Jay Clayton said that the proposal raises securities broker’s advice obligations and provides changes to how these brokers are currently operating.

The town hall, named “Investing in America, the SEC Comes to You,” was held at Georgia State University College of Law in Atlanta on June 13. Clayton offered attendees examples of how a broker’s behavior will change under the SEC’s proposed Regulation Best Interest rule. 

“In suitability, if you come up with two investments that are suitable for your client, there are people who will argue that you’re allowed to look at which investment makes you, the broker, more money and put the client into that investment,” Clayton told the gathering. 

He added that under the new standard a broker “cannot put your interests ahead of your clients’ interest.” He said that the agency is prepared to add this stipulation to the final rule saying, “this is a proposal…we all have view, we want your views.” 

He told attendees that under its conduct standard for brokers, the regulator would require policies and procedures for brokers so that when “they’re going to make a recommendation, also reflects a duty of care that is enhanced.” 

Clayton also said that the agency is looking at private placement rules, saying that they could use “sprucing up.” He added, “We all recognize that the private placement space can benefit from technology without adversely affecting investor protection.” 

Clayton told attendees that when investors choose a financial professional, it is essential that they ensure that the advisor is registered with the SEC or state in which they live. He warned that if not registered, the “risks you are taking in dealing with them go up dramatically,” due to no agency oversight or inspection. 

Clayton also conveyed the differences between dealing with a broker-dealer or an investment advisor. He described the scope of the relationship, with a broker-dealer being transaction-based, and an investment advisor relationship as being “portfolio-based.” 

He also pointed out that investors need to determine how their investment professional is paid to ascertain their relationship. Clayton clarified that a broker-dealer is typically paid through commission, whereas an investment advisor “generally charges you a quarterly or annual fee based on the level of assets” they manage. 

“Understanding the fees, how they are compensated, helps you understand their incentives,” Clayton added. “I believe when you understand someone’s incentives, you have a much better relationship with them.” 

He said that the goal of the SEC is to advise retail investors to ensure that they clearly understand the upfront fees they are paying. He added that if the fees are not presented in a clear and direct fashion, they are probably “too complex” for a retail investor to understand. 

In speaking directly to the retail investors in the audience, Clayton warned that they need to be proactive in performing due diligence on their chosen financial professional. If they “have they done something wrong in the past? That’s a good indication that they might do something wrong in the future,” he said. 

Clayton concluded the town hall meeting by saying the SEC has “made strides” with the Financial Industry Regulatory Authority (FINRA) as well as individual states. He detailed how the agency’s new website allows investors to search its database of individuals who have been suspended or barred from advising investors due to a violation of federal securities laws.