09 May 2018

Financial Times: The SEC’s plan to protect retail investors is short on detail

The US Securities and Exchange Commission has seized a chance to protect small investors from unscrupulous brokers. But it is too soon to tell whether “Regulation Best Interest”, as the SEC is calling its proposed new rules, will live up to its sweeping promises.

Chairman Jay Clayton has made the first proposals in 30 years to tighten the requirements for brokers who offer investment advice and make clearer what duties they owe to their retail clients.

The package, sent out for 90 days of public consultation last month, would require brokers to act in the “best interests” of their clients when recommending investments. It also mandates their employers — big banks and brokerage houses — to put in place rules to “mitigate” conflicts of interest created by financial incentives such as sales contests and free trips for top brokers.

In theory, the best interest proposal should be a big step up from the current SEC rules, which only require brokers to consider the “suitability” of the investments they recommend.

But the SEC’s 407-page proposal contains this baffling sentence: “We are not proposing to define ‘best interest’ at this time,” which rather leaves the whole purpose of the exercise up for grabs.

There is another problem: the proposal says that brokers in decades-long relationships with their customers have no duty to monitor those accounts in between their “episodic” recommendations. As long as the advice made sense at the time, brokers do not have to tell their clients if circumstances have changed.

Mr Clayton’s effort to reshape the rules for brokers comes at a time of momentous change in American financial regulation, and generally not for the better. Congress is in the advanced stages of passing legislation that would roll back some protections adopted in the wake of the financial crisis, and President Donald Trump’s choice to head the Consumer Financial Protection Bureau, Mick Mulvaney, appears intent on dismantling the agency set up to protect borrowers from abusive practices.

This sort of political environment threatens to rub off on the SEC. The commission is supposed to be an advocate for investors, who too often end up in ill-performing, high-fee investments based on recommendations from self-serving brokers. Bad advice costs investors tens of billions of dollars annually.

Full article on Financial Times (subscription required)

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