Personal Finance

SEC adopts rule to protect ordinary investors, but critics say it’s too lax

The Securities and Exchange Commission on Wednesday adopted a new regulation that calls for brokers to act in the best interest of their clients when making investment recommendations.

In a 3-to-1 vote, commissioners approved the Regulation Best Interest, along with other regulatory actions intended to enhance disclosures and clarify certain advisors’ existing responsibility to put their clients’ interests before their own.

The SEC’s action, supported by the broker-dealer industry but opposed by consumer and investor advocates as not going far enough, comes a year after regulators first proposed most of the changes included in the approved package.

The U.S. Securities and Exchange Commission in Washington, D.C.

Adam Jeffery | CNBC

Regulation Best Interest will apply to investment recommendations, whether an individual stock or bond or a certain account type, such as a rollover individual retirement account.

Supporters of the rule say it will be an improvement over current standards for brokers, which only require them to make sure an investment is “suitable” for a client.

Nevertheless, critics warn that it falls short of eliminating conflicts of interest — such as commission-based pay or other financial arrangements — that end up costing investors and lining the pockets of brokers.

Compliance by broker-dealers will include making required disclosures and working to mitigate conflicts that could lead a broker to make a recommendation that is not in the client’s best interest.

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Additionally, a so-called relationship summary form will be a required disclosure. It will include a variety of information such as the fees charged, services offered, conflicts of interest and whether the firm and its financial professionals have a history of legal or disciplinary actions.

Commissioners also adopted interpretations of existing law pertaining to the advisors that the SEC oversees and when investment advice can be considered “incidental” by a broker and not subject to additional regulation.

Vetting a financial advisor infographic

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