New SEC Rules to Impose Higher Conflict of Interest Standards on Broker-Dealers

New SEC Rules to Impose Higher Fiduciary Duty Standard on Broker-Dealers

A new set of amendments to the Securities and Exchange Commission regulation to impose a higher fiduciary duty standard on broker-dealers was recently approved in a 3-1 vote. 

What the New Rule Means

The intention of the new regulations was to reform the fiduciary standards for brokers and financial advisers to limit conflicts of interest. Although some, like Robert Jackson who voted against the measure, believe that the rule does not provide enough protection for investors.  

Rather than prohibit conflicts of interest, as many proponents of the fiduciary standard desire, the new regulations merely require such conflicts to be disclosed. But because written disclosures about investment often are incredibly voluminous and often very difficult to understand, many believe that the disclosure obligation will not provide any meaningful protection to investors. Rather, the required disclosures likely will be buried in very lengthy, rarely read prospectuses, creating the strong likelihood that investors will never learn of the conflicts.

According to SEC chairman Jay Clayton, the rule is a start in the right direction. For example, the Regulation of Best Interest imposes a standard of conduct that regulates relations between brokers and retail investors which included compensation-related conflicts.

Three Major Changes to Regulation

  1. Brokers must disclose any and all pertinent material facts about the broker and client relationship including the broker’s capacity, fees, the scope of services, limitations on services, and relevant conflicts of interest.
  2. Brokers must provide and maintain written policies detailing the rules regarding conflicts of interest. Broker-dealers are required to eliminate sales contests, quotas, bonuses, and all other non-cash compensation as an incentive to sell specific services and products.
  3. When entering into a relationship with a client, brokers and financial advisers are required to include a client relationship summary in their agreement. The summary must include details about their services and products, list the costs and fees, and name any conflicts of interest. The summary must also provide the standard of conduct and disclose any history of misconduct or disciplinary action taken against the broker or adviser.

 

Broker-Dealer Exclusion

The regulation includes a Broker-Dealer exclusion clause that may apply to a broker who does not receive a reward or any special compensation based on the performance of their advisory services.

Speak with an Investment Fraud Attorney

Our AV-rated* lawyers have extensive experience litigating a broad range of investment disputes, including those involving stockbroker misconduct. If you or a loved one has experienced investment losses as a result of stockbroker misconduct, we highly recommend you contact a qualified attorney immediately.  

The investment fraud lawyers at Dimond Kaplan & Rothstein, P.A. are seasoned professionals with experience representing represent individual and institutional investors who have lost money as a result of investment fraud or stockbroker misconduct.

We’ve recovered more than $100 million in assets lost to investment fraud and stockbroker misconduct and we will aggressively pursue claims for you and fight for your rights.

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