New SEC Rule Binds Brokers to Act in Best Interest of Investors

The US regulator voted on its best interest rule, guiding brokers to abide by client interests

Stockbrokers in the US will officially be required to act in the best interest of their clients and investors. The SEC passed the vote today to apply the new rule with a 3 to 1 split. Brokers will be required to inform their customers should there be a conflict of interest between the firm and their clients, more specifically when they advise their customers.

According to the US securities regulator, the new rule will enable investors to gain access to in-depth knowledge about the ways in which their brokers are compensated. For example, should a broker stand to gain from a piece of specific advice it is giving to a client it will be mandated to disclose that to the customer?

While in the past the main task of brokers has been to fill the orders of their clients, due to the advancements in automation over the past decades, the ways through which brokers are generating income are changing.

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Investment Advice

With the establishment of the electronic trading era, brokers are now mostly generating income from investment advice. After allowing brokers to act is such for years without any disclosures, today the SEC changed what has become a market standard.

The Chairman of the SEC, Jay Clayton commented to today’s package of measures: “This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

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“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” said SEC Chairman Jay Clayton.

The actions taken by the SEC are designed to bring the standards governing the operations of broker-dealers and investment advisers to a new level. Product enhancement and more clarity are two traits which retail investors have been actively looking forward to over the past decades.

Regulation Best Interest

The Republican leadership of the SEC marked the step as a new era in the relationship between broker-dealers and their clients, but the lone dissenter in the vote, Democratic commissioner Robert Jackson Jr. stated that the new rule is a “weak mix of measures.”

In an official statement, the SEC elaborated that the clients can make a better-informed choice of the relationship best suited to their needs and circumstances.

Under Regulation Best Interest, broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. That said, consumer advocates, state that the new rule doesn’t go far enough and the definition of best interest is murky.

The SEC outlined that the Regulation Best Interest is designed to enhance the broker-dealer standard for conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.

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