A bill that cleared the House on Wednesday includes an amendment that would upend securities regulators’ plans to hold brokers to a new standard when giving advice to retail investors.
Added to an appropriations bill that passed 224 to 196, the late addition would prohibit the Securities and Exchange Commission from implementing and enforcing a new regulation that calls for brokers to act in the best interest of their clients when making investment recommendations.
The amendment was sponsored by Rep. Maxine Waters (D-Calif.), who chairs the House Financial Services Committee. It was one of dozens of amendments offered, and among those that were approved by the House.
Rep. Maxine Waters, a Democrat from California and chair of the House Financial Services Committee, at a congressional hearing.
Andrew Harrer | Bloomberg | Getty Images
The bill will head to the Senate, where the Waters amendment would be less likely to be embraced in the Republican-dominated chamber. Senators could vote on their own version, and then the differences would need to be worked out between the two chambers.
The target of Waters’ amendment is the SEC’s “Regulation Best Interest.” Along with other regulatory actions intended to enhance disclosures and clarify some advisors’ existing responsibility to put their clients’ interests before their own, the new regulation was approved in early June in a 3-1 vote by commissioners.
Supporters of the rule — which includes the broker-dealer industry — say it will be an improvement over the current standard for brokers, which only requires them to make sure an investment is “suitable” for a client.
Nevertheless, critics warn that it falls short of eliminating conflicts of interest — such as commission-based pay or other financial arrangements — that end up costing investors and lining the pockets of brokers.
The regulation comes with a compliance date of June 30, 2020. It will apply to investment recommendations, whether an individual stock or bond or a certain account type, such as a rollover individual retirement account.
Compliance by broker-dealers will include making required disclosures and working to mitigate conflicts that could lead a broker to make a recommendation that is not in the client’s best interest.
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The rule also bans sales contests among broker-dealers, and requires brokers to consider the cost of an investment when determining whether it is in the best interest of the customer.
Additionally, a so-called relationship summary form will be a required disclosure. It will include a variety of information such as the fees charged, services offered, conflicts of interest and whether the firm and its financial professionals have a history of legal or disciplinary actions.
Commissioners also adopted interpretations of existing law pertaining to the advisors that the SEC oversees and when investment advice can be considered “incidental” by a broker and not subject to additional regulation. Those two items will be effective once they are published in the Federal Register.