Yesterday was the last official day to send in comments to the SEC on its package of three proposed rules meant to protect investors from unscrupulous brokers, and a group of plaintiff lawyers is calling for “major surgery” to the proposal, while a coalition of 17 attorneys general is calling it an “inadequate attempt to address a long-recognized deficiency in regulation.”
The problem is that many investors mistakenly think that brokers are acting in a fiduciary-type relationship of trust, not just subject to a “suitability” standard when making investment recommendations. The attorneys general are calling for the SEC to impose a uniform fiduciary standard to apply to both investment advisers and broker-dealers as recommended by a 2011 SEC study written under the Dodd-Frank consumer protection law.
“This rule needs to be strengthened to give it the real teeth it needs to protect investors,” says Andrew Stoltmann, a securities fraud lawyer in Chicago and president of the board of the Public Investors Arbitration Bar Association, whose members represent investors in cases against financial services firms. “We don’t know whether the SEC is going to do this or cave into industry’s demands to weaken it,” Stoltmann says.
Stoltmann noted that the SEC and chairman Jay Clayton have been on a listening tour, taking industry and investor-advocate comments into account. It’s possible we’ll end up with nothing. There are very strong forces lobbying against the rule and in favor of watering it down further, he says.
That’s despite the fact that the SEC proposal is a watered-down version of the DOL’s proposed fiduciary rule, championed by former president Barack Obama. The DOL fiduciary rule, first proposed in 2010, is functionally dead. It would have imposed a fiduciary standard on those who give out retirement investment advice.
But once President Trump took office, he ordered the DOL to review the rule, and the DOL put enforcement on hold. Meanwhile, industry groups fought the rule in the courts, and when it was struck down, the DOL didn’t appeal. Then the action moved back to the SEC.
“We’re offering concrete suggestions and not just whining about how terrible it is,” says Sacramento, California, lawyer Melinda Steuer, a report co-author.
Here are PIABA’s top recommendations:
The rule should ban certain financial incentives like sales contests where top-selling brokers can win weeklong trips.
The rule should require clear, understandable disclosure of fees, including an explanation of other lower costs investments, and why the higher cost investment is being recommended and is in the best interest of the customer (not just in writing).
The rule should make it clear (beyond a footnote) that states can make laws with higher standards for brokers.
Here is a link to the PIABA report.
Here is a link to the comments filed by the attorneys general.
