Bill would give SEC vast powers to regulate broker compensation

The Securities and Exchange Commission would gain more authority to make rules governing broker compensation under draft legislation sent by the Department of the Treasury to Capitol Hill Friday.
“The legislation would give the commission clear authority to write rules that ban brokers and advisers from unfair sales and compensation practices,” said John Nester, spokesman for the SEC.
The SEC currently does not have the authority to write rules that ban compensation practices, he said.
The SEC’s rules primarily require that disclosures be made to investors concerning possible conflicts of interest that advisers or brokers may have.
The draft legislation would empower the SEC to “examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary but are not in the investors’ best interest,” according to a fact sheet issued by the Treasury Department when it released the draft.
In the draft, the SEC would be given broad authority to define what practices would be covered under the provision, Michael Barr, assistant treasury secretary for financial institutions, said in a telephone press briefing Friday.
“If higher compensation is given for the sale of an in-house product, if advice is being given with respect to that product, the advice would need to be given irrespective of that compensation arrangement,” he said.
The practices covered could include things such as cold calling, Mr. Barr said.
Mutual fund revenue sharing, under which mutual funds pay brokers fees for distribution of funds, also could receive greater scrutiny if the provision becomes law.
The draft legislation would require all brokers acting as investment advisers to abide by fiduciary standards.
Brokers would have to make recommendations that were suitable for investors, while investment advisers would be required to act as fiduciaries, meaning they would have to act in the best interests of the investors they represented.

Related Topics: Securities and Exchange Commission