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The staff of the Securities and Exchange Commission will recommend Friday that the agency adopt tougher rules for how stockbrokers sell investments to clients, Fox Business has learned.
If eventually adopted by the commission, the regulations could make it easier for clients to sue their brokers when an investment goes bad. But critics say new rules could lead to higher investing costs, fewer products and a flood of unnecessary litigation.
According to financial industry and investor advocacy sources, the staff will recommend that brokers be required to put a client's interest first, under a stronger "standard of care" in many sales of investments.
The higher standard is commonly known as "fiduciary duty,” under which a financial advisor acts as a “fiduciary” -- a trusted custodian working foremost on the client’s behalf. It would cover more than 600,000 broker-dealers and millions of their customers.
The recommendations will come in a staff study ordered by Congress as part of the new Dodd-Frank financial regulation reform legislation. The measure also allows the agency to launch a rulemaking on the issue at its discretion.
With potentially billions of dollars of commissions and fees at stake, the provision has triggered an all-out war among Wall Street firms, investor advocates, separately-regulated investment advisors and even insurance brokers who may also peddle investments. In 2009, in the wake of the financial crisis, Wall Street preemptively endorsed tougher sales rules for stockbrokers—the battle is over how tough.
Raising broker sales standards has been a top priority for SEC Chairman Mary Schapiro. According to the SEC’s website, the commission has already penciled in time in Spring to consider propose rules on the issue “as may be appropriate."
One consumer advocate involved in the discussions, Barbara Roper of the Consumer Federation of America, said the recommendations in the study have ''the potential to dramatically alter both the way in which investment advice is delivered and the way in which investment advisers are overseen by regulators."
The rules would not cover all broker sales of stocks, bonds and other investments. The Dodd-Frank legislation specifically limits any new rules to "personalized investment advice" that stockbrokers give clients, such as to buy a stock recommended by a firm's research department.
Now when a broker does that, under SEC regulations, the broker only has to make sure that the investment is "suitable" for the client -- a standard that is open to widespread legal interpretation and has been attacked by investor advocates as too weak to protect customers.
Higher standards of duty would not protect an investor who calls a broker and gives him a buy order on a stock that the client has researched independently or is purchasing on a “hot tip” from a buddy – that would not constitute "personal investment advice" from a broker.
In effect, the recommendations from the SEC staff would impose a similar standard of care now required for 275,000 separate professional investment advisors whom the SEC regulates as fiduciaries. They usually charge a fee based on the assets they manage for a client, while stockbrokers often are paid by commission. The SEC issued a related study on investment advisors on Wednesday.
Sources say that in the staff recommendations on the study coming Friday, wording will be critical to any later SEC rulemaking---especially the staff’s description and definition of the stronger standard. Supporters of tough standards worry the study could lay the groundwork for loopholes that would allow brokers to avoid new responsibilities.
Wall Street officials are equally nervous. “ ‘Personalized investment advice’…I want them to define that,” said one official close to the process.
Another source close to the process said SEC staff members are expecting considerable scrutiny of their work and have labored to avoid loopholes, though they acknowledge the fine print in final rules will have to be resolved by the agency’s five commissioners after months of hearings, public comment and additional analysis.
The SEC received more than 3,500 comment letters on the study.
The staff of the Securities and Exchange Commission will recommend Friday that the agency adopt tougher rules for how stockbrokers sell investments to clients, Fox Business has learned.
If eventually adopted by the commission, the regulations could make it easier for clients to sue their brokers when an investment goes bad. But critics say new rules could lead to higher investing costs, fewer products and a flood of unnecessary litigation.
According to financial industry and investor advocacy sources, the staff will recommend that brokers be required to put a client's interest first, under a stronger "standard of care" in many sales of investments.
The higher standard is commonly known as "fiduciary duty,” under which a financial advisor acts as a “fiduciary” -- a trusted custodian working foremost on the client’s behalf. It would cover more than 600,000 broker-dealers and millions of their customers.
The recommendations will come in a staff study ordered by Congress as part of the new Dodd-Frank financial regulation reform legislation. The measure also allows the agency to launch a rulemaking on the issue at its discretion.
With potentially billions of dollars of commissions and fees at stake, the provision has triggered an all-out war among Wall Street firms, investor advocates, separately-regulated investment advisors and even insurance brokers who may also peddle investments. In 2009, in the wake of the financial crisis, Wall Street preemptively endorsed tougher sales rules for stockbrokers—the battle is over how tough.
Raising broker sales standards has been a top priority for SEC Chairman Mary Schapiro. According to the SEC’s website, the commission has already penciled in time in Spring to consider propose rules on the issue “as may be appropriate."
One consumer advocate involved in the discussions, Barbara Roper of the Consumer Federation of America, said the recommendations in the study have ''the potential to dramatically alter both the way in which investment advice is delivered and the way in which investment advisers are overseen by regulators."
The rules would not cover all broker sales of stocks, bonds and other investments. The Dodd-Frank legislation specifically limits any new rules to "personalized investment advice" that stockbrokers give clients, such as to buy a stock recommended by a firm's research department.
Now when a broker does that, under SEC regulations, the broker only has to make sure that the investment is "suitable" for the client -- a standard that is open to widespread legal interpretation and has been attacked by investor advocates as too weak to protect customers.
Higher standards of duty would not protect an investor who calls a broker and gives him a buy order on a stock that the client has researched independently or is purchasing on a “hot tip” from a buddy – that would not constitute "personal investment advice" from a broker.
In effect, the recommendations from the SEC staff would impose a similar standard of care now required for 275,000 separate professional investment advisors whom the SEC regulates as fiduciaries. They usually charge a fee based on the assets they manage for a client, while stockbrokers often are paid by commission. The SEC issued a related study on investment advisors on Wednesday.
Sources say that in the staff recommendations on the study coming Friday, wording will be critical to any later SEC rulemaking---especially the staff’s description and definition of the stronger standard. Supporters of tough standards worry the study could lay the groundwork for loopholes that would allow brokers to avoid new responsibilities.
Wall Street officials are equally nervous. “ ‘Personalized investment advice’…I want them to define that,” said one official close to the process.
Another source close to the process said SEC staff members are expecting considerable scrutiny of their work and have labored to avoid loopholes, though they acknowledge the fine print in final rules will have to be resolved by the agency’s five commissioners after months of hearings, public comment and additional analysis.
The SEC received more than 3,500 comment letters on the study.
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