US gov­ern­ment pro­poses new rules for bro­kers on re­tire­ment ac­counts


Bro­kers who man­age Amer­i­cans’ re­tire­ment ac­counts may soon be re­quired to put in­vestors’ in­ter­ests first un­der new re­stric­tions pro­posed by the U.S. gov­ern­ment.

The La­bor Depart­ment on Tues­day opened the rules to public com­ment for 75 days. The Obama ad­min­is­tra­tion has put its weight be­hind the move. Against a back­drop of in­tense op­po­si­tion from the fi­nan­cial in­dus­try on an ear­lier pro­posal, ad­min­is­tra­tion of­fi­cials took pains to re­as­sure the in­dus­try that the new frame­work wouldn’t end the way bro­kers do busi­ness or pro­hibit them from re­ceiv­ing com­mis­sions or other fees.

The pro­posal would pro­vide “guardrails but not strait jack­ets” for pro­tect­ing Amer­i­cans’ re­tire­ment in­vest­ments, La­bor Sec­re­tary Thomas Perez said in a con­fer­ence call with re­porters.

The changes would put bro­kers — who sell stocks, bonds, an­nu­ities and other in­vest­ments — un­der the stricter re­quire­ments for reg­is­tered fi­nan­cial ad­vis­ers. Fierce de­bate and lob­by­ing over the pro­posal is ex­pected.

The stricter rules could al­ter the types of in­vest­ments a bro­ker rec­om­mends to you for your re­tire­ment ac­count. Their ad­vice could move away from riskier in­vest­ments.

And a bro­ker will have to tell you when they have a con­flict of in­ter­est re­gard­ing a fi­nan­cial prod­uct — like re­ceiv­ing fees — that could pre­vent them from putting your in­ter­est first in rec­om­mend­ing it. A legally bind­ing con­tract with cus­tomers would re­quire bro­kers to act in their best fi­nan­cial in­ter­est. Of­fi­cials said bro­kers would have “flex­i­bil­ity” in how they’re paid, so long as they ex­er­cise a fidu­ciary duty to­ward their clients. If an in­vestor be­lieved that their bro­ker or in­vest­ment ad­viser vi­o­lated the con­tract, he or she would be en­ti­tled to pur­sue ac­tion in ar­bi­tra­tion. Fidu­cia­ries, such as doc­tors or lawyers, are ob­li­gated to put their clients’ in­ter­ests first.

To Dis­close or Not to Dis­close?

Bro­kers buy and sell se­cu­ri­ties and other fi­nan­cial prod­ucts on be­half of their clients. They also can give fi­nan­cial ad­vice, with one key re­quire­ment. They must rec­om­mend only “suit­able” in­vest­ments based on the client’s fi­nances, their age and how much risk is ap­pro­pri­ate for him or her. So they can’t pitch penny stocks or real es­tate in­vest­ment trusts to an 85-year-old woman living on a pen­sion, for ex­am­ple. But bro­kers can nudge clients to­ward a mu­tual fund or vari­able an­nu­ity that pays the bro­ker a higher com­mis­sion — with­out telling the client. Bro­kers don’t have to dis­close that po­ten­tial con­flict of in­ter­est.

Reg­is­tered in­vest­ment ad­vis­ers, on the other hand, are fidu­cia­ries, con­sid­ered by law to be trustees for their clients. That means dis­clos­ing po­ten­tial con­flicts as well as fees they re­ceive and any pre­vi­ous dis­ci­plinary ac­tions against them. They must tell a client if they, or their firm, re­ceive money from a mu­tual fund com­pany to pro­mote a prod­uct. And they have to reg­is­ter with the Se­cu­ri­ties and Ex­change Com­mis­sion, open­ing them to pos­si­ble close in­spec­tions and su­per­vi­sion.

The pro­posal “up­dates the rules to crack down on ... con­flicts of in­ter­est in re­tire­ment ad­vice that are cost­ing work­ing and mid­dle-class fam­i­lies bil­lions of dol­lars ev­ery year,” Obama said in a state­ment.

“A cen­tral goal of mid­dle-class eco­nomics is help­ing re­spon­si­ble Amer­i­can fam­i­lies re­tire with se­cu­rity and dig­nity af­ter a life­time of hard work, and to­day’s ac­tion by the Depart­ment of La­bor is an im­por­tant step to­ward that goal.”

The new re­quire­ments wouldn’t ap­ply to bro­kers tak­ing di­rect buy or sell or­ders from cus­tomers with­out pro­vid­ing ad­vice. With­out time to have pored over the fine print of the pro­posal, Wall Street’s lead lob­by­ing group re­served judg­ment.

“We want to en­sure it protects in­vestor choice and doesn’t un­nec­es­sar­ily re­duce ac­cess to ed­u­ca­tion or raise costs, par­tic­u­larly for low- and mid­dle-in­come savers,” Ken­neth Bentsen, pres­i­dent of the Se­cu­ri­ties In­dus­try and Fi­nan­cial Mar­kets As­so­ci­a­tion, said in a state­ment.

A coali­tion of con­sumer, la­bor and civil rights groups called SaveOurRe­tire­ment called the pro­posal “a ma­jor victory for con­sumers that will help bring mil­lions of Amer­i­cans one step closer to a se­cure, dig­ni­fied re­tire­ment.”

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