SEC chairman explains desire for clearer disclosures and higher standards for brokers at Denver roundtable

Federal securities regulators want individual investors and the people providing them financial advice or products to get on the same page — make that the same four pages.

That’s the length of a proposed disclosure form the U.S Securities and Exchange Commission may soon require advisers and brokers to provide clients.

The form spells out the relationship — terms of compensation, any regulatory sanctions, and the broker’s or adviser’s duty to make recommendations in the “best interest” of the client.

Securities and Exchange Commission Chairman Jay ...
Pablo Martinez Monsivais, The Associated Press

Jay Clayton, Securities and Exchange Commission chairman

SEC chairman Jay Clayton hosted a roundtable in Denver on Wednesday that was attended by more than two dozen investors. Clayton told The Denver Post the goal is to bring clarity to an issue where there is a great deal of confusion.

Historically, the investment world has been split between advisers who oversee a client’s portfolio for a management fee and broker-dealers who conduct transactions, usually for a commission.

Advisers have a fiduciary duty to place the interest of clients before their own at all times. But broker-dealers are under a less stringent standard to make sure that the advice or products offered are “suitable.”

Over time, more brokerage firms started offering advisory services, and the dividing line became murkier. The Dodd-Frank Act required the SEC to study the issue and provide stronger investor protections.

One route would have been to hold broker-dealers to the same standard as investment advisers. But a federal court this spring threw out an attempt by the Department of Labor to do just that. The SEC responded by unveiling a “best interest” standard and prohibiting the use of the term adviser when it would mislead investors.

Clayton said the proposed rule requires broker-dealers to act in the best interest of their retail customers. In that regard, it is like the fiduciary standard that advisers must follow.

But one criticism is that the SEC hasn’t clearly defined “best interest.” Without clarity and adequate penalties for violators, some worry that consumers won’t be protected adequately.

“We just don’t think this proposed rule goes far enough. We like the fact they are encouraging a best interest standard. They just don’t define it,” said Bob Murphy, state director of AARP Colorado.

For example, the new rule clearly discourages brokers from selling investments to clients where they receive an extra commission or win rewards, say in an internal sales contest.

But what if a broker recommends an in-house mutual fund that generates management fees for the investment firm, without receiving any additional personal compensation? Are they acting in the client’s best interest?

“A lot of what needs to go on is education,” said Stan Poladsky, a real estate agent in Denver who came out of the roundtable in support of the new disclosure form and standard.

Others present argued the SEC needs to shrink the form.

“We said it was too long. Our eyes usually glaze over after two or three paragraphs,” said Phil Steckley, a Lakewood retiree who spent three decades as a financial planner and registered investment adviser.

Clayton said the goal of the proposed changes is to bring legal requirements and mandated disclosures in line with investor expectations. To do that, it was important to hear directly from investors.

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