The Protections and Exchange Commission on Wednesday adopted a new regulation that calls for brokers to act in the best interest of their clients when enacting investment recommendations.
In a 3-to-1 vote, commissioners approved the Regulation Best Interest, along with other regulatory fightings intended to enhance disclosures and clarify certain advisors’ existing responsibility to put their clients’ interests before their own.
The SEC’s initiative, supported by the broker-dealer industry but opposed by consumer and investor advocates as not going far enough, comes a year after regulators initial proposed most of the changes included in the approved package.
The U.S. Securities and Exchange Commission in Washington, D.C.
Adam Jeffery | CNBC
Dictate Best Interest will apply to investment recommendations, whether an individual stock or bond or a certain account kind, such as a rollover individual retirement account.
Supporters of the rule say it will be an improvement over current standards for middlemen, which only require them to make sure an investment is “suitable” for a client.
“While we have yet to fully give ones opinion of the final rule, what we heard during the [SEC’s meeting] gives us hope that it will protect investors while also salting investor choice and access to professional advice,” said Dale Brown, president and CEO of the Financial Services Institute, an industriousness advocacy group.
Nevertheless, critics warn that it falls short of eliminating conflicts of interest — such as commission-based pay or other pecuniary arrangements — that end up costing investors and lining the pockets of brokers.
“The obligation to act in the best interests of the customer in the regulation unmistakeably codifies the obligation to make recommendations that are ‘consistent with the investor’s best interests'” under the suitability law, said Barbara Roper, director of investor protection for the Consumer Federation of America.
Compliance by broker-dealers will involve making required disclosures and working to mitigate conflicts that could lead a broker to make a recommendation that is not in the customer’s best interest.
The rule also bans sales contests among broker-dealers, and requires brokers to consider the cost of an investment when settling whether it is in the best interest of the customer.
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