For the 14 years that I worked for Merrill Lynch between 1987 and 2002, there was a constant refrain heard among those hallowed halls echoing founder Charlie Merrill’s promise to always put the needs and interests of its clients first. And for a while, it seemed the most of the good Wall Street firms followed a similar principal until, well, they didn’t. And by 2008, those firms were crashing and burning in a financial meltdown from which the rest of the country is still recovering.
Somewhere along the way putting the interest of the client first had faded away as other priorities such as increasing profits took precedent. Now, the Securities and Exchange Commission is considering a recommendation from its staff to adopt rules that would once again require brokers put their clients’ interests first or face the consequences.
The new regulations would cover how stockbrokers sell investments to clients and make it easier for clients to sue their brokers when an investment goes bad. As expected, Wall Street hates this claiming such rules will only lead to higher costs for them, cause them to reduce the number of investment products they offer and be forced to deal with what they perceive as a tsunami of unnecessary litigation.
The rules will put brokers under a stronger "standard of care" by holding them to what’s known as a "fiduciary duty.” That means a financial advisor or broker will be acting as fiduciary, or a trusted custodian working foremost on the client’s behalf, in other words putting the client’s needs first.
The new regulations would cover more than 600,000 registered brokers and millions of their customers. The question, however, is ?whether this proposed advancement in investor protection actually become a reality any time soon. According to reports, five SEC commissioners must vote to adopt new rules, and two of them have already raised objections to the staff report. Also, even if the new rules are approved, Congress can always step in and change them.
As of now, brokers and financial advisers are required to make sure an investment is "suitable" for clients by doing some research on them about their financial situation and tolerance for risk. What they don’t have to do is make sure an investment is in the client’s best interest. So they could say a mutual fund fits the client’s suitability profile, but they can also recommend a fund that pays them the best commission.
Last year's financial reform law required that the SEC study whether brokers should come under the higher fiduciary standard. It generated more than 3,500 comments to the SEC, including some from insurance agents who could also come under a fiduciary standard if they sell variable annuities.
With potentially billions of dollars of commissions and fees at stake, sources say the proposed provision has triggered an all-out war among Wall Street firms, investor advocates, and separately-regulated investment advisors, not to mention the insurance brokers.
Raising broker sales standards has long been a top priority for SEC Chairman Mary Schapiro. According to the SEC’s website, the commission has already penciled in time in the 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, told Fox Business that 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.
Under current SEC regulations, when a broker does that, the broker only has to make sure that the investment is "suitable" for the client. That standard 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 something on a “hot tip.” 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.
