Press Releases

News from EPI EPI submits comments on SEC’s proposed broker-dealer rule: Rule would improve disclosure, but not ban conflicts of interest in investment advice

EPI Policy Director Heidi Shierholz and EPI Economist Monique Morrissey submitted comments to the Securities and Exchange Commission (SEC) on its proposed rules to regulate the standard of conduct for broker-dealers who make recommendations to retail customers.

The SEC has proposed a set of rules that rely heavily on disclosure of conflicts of interest to retail customers seeking financial services. The authors argue that the SEC is misguided in its belief that these regulations would improve the quality of advice given by enhancing trust between broker-dealers and customers.

“In theory, disclosing conflicts could have the same effect as banning them. In practice, we know this will not happen,” said Morrissey. “The industry’s main argument against a stronger conflict-of-interest rule has been that it will negatively affect consumer choice. If disclosure alone were effective—if transparency let investors avoid products and services that were not in their best interest—this would affect investors’ choices in the same way as banning conflicts. The fact that the industry has been largely silent or supportive of the SEC’s proposal suggests that they know it will have little effect on their bottom line or on investors’ choices.”

In 2016, the Department of Labor (DOL) addressed a gap in protections for retirement savers, many of whom are steered to high-cost products and services by broker-dealers and other financial professionals misrepresenting themselves as disinterested “advisers.” Unlike certified financial planners and registered investment advisers, broker-dealers do not have a fiduciary duty to clients and can legally steer them to higher-cost products and services that are not in their best interest as long as these are broadly “suitable” for retirement savers. The DOL rule imposed a fiduciary duty on all financial professionals offering advice to retirement savers, enforceable through class-action lawsuits. It also banned forms of compensation that created conflicts of interest, with certain exceptions.

The DOL fiduciary rule came under attack from industry groups, who argued that it would limit the products and services available to retirement savers while imposing significant compliance costs on industry that would be passed on to consumers. These arguments persuaded the current administration to delay the DOL rule and the Fifth Circuit Court to vacate it, even though the rule had been upheld in earlier court decisions. In response, the SEC proposed a set of weaker regulations that rely heavily on disclosure and have not been attacked by industry for limiting consumer options.

“Effective regulation should reduce the biased ‘advice’ received by consumers and make the market for investment products and services more competitive,” said Shierholz. “Instead, the government is, in effect, enabling bad actors at the expense of those who provide unbiased advice and sell products that are in clients’ true best interest. The government should fulfill its duty to protect investors and adopt stronger regulations, such as the DOL’s fiduciary rule.”