(Reuters) — The U.S. Securities and Exchange Commission on Wednesday published a staff bulletin that seeks to clarify how brokers and investment advisers must address conflicts of interest when providing advice and recommendations to investors.
The guidance aims to outline expectations among the industry’s “misconceptions,” an SEC official told reporters, adding that while all financial firms and professionals have some conflicts, the “nature and cost” of those conflicts can vary.
The guidance specifically clarifies the obligations of brokers and advisers regarding disclosure of conflicts of interest under the SEC’s long-standing Investment Advisor Fiduciary Standard and its Regulation Best Interest rule, adopted in 2019.
“The steps companies take to manage conflicts of interest must be tailored to their particular business model,” an SEC official said.
“They must be designed to prevent the conflicts of interest inherent in that particular firm from causing the firm and its financial experts to put their own interests ahead of the interests of retail investors, thereby breaching their duty of best interests.”
Firms are also expected to identify areas of their specific business where their own interests conflict with those of their clients and to think carefully about how these conflicts, if not adequately addressed, could adversely affect private investors. Companies need to decide what steps they need to take to address these conflicts.
Wednesday’s bulletin is designed to help businesses with this process, recognizing that there is no one size fits all.
Specifically, the guidance, which is the second in the series, identifies some common sources of conflicts of interest for brokers, investment advisers, dual-registered firms and their financial experts by outlining factors that firms may consider in determining whether a particular conflict must be vacated, as well as possible approaches to defuse conflicts when necessary.
The Republican-led SEC finalized the Best Interest rule in 2019 in what was widely seen as a win for Wall Street after its 10-year battle over the regulation of the investment advice industry. It fought a more onerous proposal from the Labor Department.
Consumer groups criticized the regulation’s Best Interest rule for being too vague in its definition of “best interest” while failing to address all conflicts, including the higher payments brokers receive for selling products that are more expensive to trade.
Wednesday’s action under the current Democratic-led SEC seeks to close some of those gaps, analysts said.