SEC Clarifies Broker, RIA Obligation to Disclose Conflicts

The SEC guidance identifies some common sources of conflicts of interest for broker-dealers and investment advisors.

The U.S. Securities and Exchange Commission (SEC) on August 3 published a staff bulletin that seeks to clarify how broker-dealers and investment advisors must address conflicts of interest when providing advice and recommendations to investors.

The guidance aims to spell out expectations amid industry “misconceptions,” an SEC official told reporters, adding that while all financial firms and professionals have some conflict, the “nature and expense” of those conflicts can vary.

The guidance specifically clarifies brokers’ and advisors’ obligations around disclosing conflicts of interest under the SEC’s long-standing Investment Advisor Fiduciary Standard and its Regulation Best Interest rule, passed in 2019.

“The steps firms take to address conflicts of interest need to be tailored to their particular business model,” an SEC official said.

“They need to be designed to prevent those conflicts of interests that are present at that particular firm from causing the firm and its financial professionals to place their own interests ahead of the retail investors’ interests and thereby to violate their best interests obligation.”

No One-Size Fits All

Firms are also expected to identify areas in their particular business where their own interests are in conflict with their customers and to think carefully about how those conflicts, if not adequately addressed, might negatively affect retail investors. Firms must determine what steps they must take to address those conflicts.

The bulletin August 3 is designed to help firms with this process, recognizing that there is no one-size-fits-all approach.

Specifically, the guidance, which is the second in a series, identifies some common sources of conflicts of interest for broker-dealers, investment advisors, dual registered firms and their financial professionals by outlining factors firms can consider in determining whether a particular conflict needs to be vacated, as well as possible approaches to conflict mitigation when that is necessary.

The Republican-led SEC finalized the Regulation Best Interest rule in 2019 in what was widely seen as a win for Wall Street after its 10-year battle over regulation of the investment advice industry. It fought off a more onerous proposal by the Department of Labor.

Consumer groups criticized the Regulation Best Interest rule for being too vague in its definition of “best interest” while not addressing all conflicts, including the higher payments that brokers receive for selling products that are more expensive to trade.

The measure August 3 under the current Democratic-led SEC seeks to plug some of these gaps, analysts said.

This article was provided by Reuters.

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