SEC’s Regulation Rule to be Evaluated by Court

SEC RegulationThe main role of the United States Securities and Exchange Commission is regulating the U.S. securities markets. This is, generally, good news for consumers since it usually requires regulated public and private companies to be clear about their finances, forcing them to publish periodical reports, thus aiding them to make their investment decisions.

While trying to comply with its role, the SEC now requires from brokers to disclose their conflicts of interest when they recommend a financial product that benefits them. Or at least, this is what they approved recently in a vote. In other words, brokers and financial advisers will be able to recommend a financial product that is on their interests to do so as long as they disclose this fact to their costumers.

This implies that the SEC is trying to force financial advisers, in general, to seek out the best interests (and this could mean anything) of their customers when recommending financial products, a rule that could affect their profits.

This effort, better known as “Regulation Best Interest” rule, is part of a general attempt to regulate the financial advice industry, and if approved would be implemented by June 2020.

However, not everyone is happy with this move, as Seven U.S. states together with the District of Columbia filed a complaint in the U.S. District Court in the Southern District of New York, as an attempt to block the new rules.

This is not the first time a group of interest tries to block a rule like this in courts. Last year the United States Department of Labor attempted to impose what is considered the predecessor of this rule,” the fiduciary rule”, but the U.S. Fifth Circuit Court of Appeals vacated it on June 21, 2018.

What does this mean for financial salespersons?

Currently, when trying to sell a financial product,brokers, financial advisers and planers must comply with something called “the Suitability rule”, which ensures that the customer needs and objectives are met by the investment recommendation the financial services companies/vendors provide.

If approved, “Regulation Best Interest” rule, would not only force financial salespersons to provide “suitable” recommendations to their customers, it would force them to seek the customer’s interests over theirs. In their words, the financial services companies and individual advisors “will be required to prepare, deliver to retail investors, and file a relationship summary”

For example, if the financial salesperson is paid more for promoting a certain financial product it must disclose this fact to its customer when offering this particular product.

Many of you have probably already sensed how controversial this rule could be, in fact, some estimate that this rule could have cost the financial services industry an estimated $2.4 billion per year! being the small financial firms the main victim of it.

When filling their complaints about this rule, the states of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon and the District of Columbia claimed that such a rule is “arbitrary and capricious,” adding that it is not clear enough.

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