New SEC Rule Requires Brokers To Provide Better Advice

June 7, 2019
New SEC Rule Requires Brokers To Provide Better Advice June 7, 2019 Kevin Stokes

The US Securities and Exchange Commission (SEC) have come out with a new rule which looks to protect investors and ensure that they are not exploited by brokers.

The SEC just voted this new rule with a three to one split. Now, stockbrokers are required to act in the best interest of their clients and investors at all times. This is a big change since there will be situations when a broker will have to deal with a conflict of interest between their firm interest and their clients.

The SEC believes that investors would be able to get better advice from their brokers with this new regulation.

Also, this will give them a better idea of how exactly brokers profit from their relationship. For example, with the new rule in place, brokers are supposed to tell their investors if they stand to gain from the advice they are giving them.

In the past, brokers mainly just filled the orders of their investors and in return got a small commission. However, automation has made sure that this job is done more efficiently via software. Now, brokers earn their money by giving investment advice. The SEC has left this scheme alone for years but has now decided to address this by coming out with a new rule.  

In a statement, Jay Clayton, SEC Chairman, said

This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost. The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades.

A New Era In Trading

The rule signals a new era for investor-broker relations. Increased transparency and a better product are the expected results of this change. However, the only dissenter in the vote is Democratic commissioner Robert Jackson Jr. who thinks that the new rule is pretty weak.

Formally named as ‘Regulation Best Interest’, broker-dealers need to act in the best interest of their retail customer when it comes to making any recommendation to securities transactions. If they are giving investment advice, they need to ensure that their customer knows if the broker will get a profit from their decision.

The new rule is not perfect though. According to critics, the rule does not properly define what is in the best interest of the investor. Additionally, critics think the language needs to be stricter so that investors would be better protected.

About the Author

Kevin Stokes

Kevin Stokes Contributor

Kevin is our crypto expert, he will be keeping us in the know with all the going ons in the market as well as news on ICO's and the latest coins. Kevin has worked previously in the finance sector.


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