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Warren chides SEC on proposed broker standard

Sen. Elizabeth Warren is pressing SEC Chairman Jay Clayton to set a uniform fiduciary standard for advisors and broker-dealers, rather than the dual standard the commission is developing with its so-called Regulation Best Interest proposal.

The SEC has failed to define the term "best interest" in its proposal, and, in effect, is preserving a two-tiered regulatory landscape in which investment professionals providing fundamentally similar services operate under different sets of rules, the Massachusetts Democrat charges. And average investors, the SEC's own survey found, don't understand the differences, Warren said at a recent oversight hearing.

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Joe Ratterman of Bats Global Markets Inc., Nasdaq OMX Group Inc arrive for a meeting at the Securities and Exchange Commission in Washington, D.C., U.S., on Monday, May 10, 2010. The chief executive officers of the biggest U.S. stock markets were called to a meeting at the U.S.Securities and Exchange to discuss last week’s selloff in equities, according to four people familiar with the situation. Photographer: Joshua Roberts/Bloomberg

Warren argues that, in effect, the SEC's proposal could only further confuse investors. A better approach would be to put advisors and brokers on the same footing, using the same language in the regulation and holding brokers to the advisor standard. Clayton indicated that the staff is still finalizing the rule, but challenged the contention that the best interest proposal for brokers is far weaker than the current fiduciary standard for advisors.

While "best interest" is not explicitly defined in the proposal, it is based on the fundamental principle that brokers must put their clients' interests ahead of their own, Clayton said. So in that sense, the same style of client-first framework would apply to brokers and advisors alike.

"Let me suggest, Mr. Chairman, if it's the same, just use the same words," Warren said at the hearing.

"We may do that," Clayton responded.

An SEC spokeswoman declined to elaborate on Clayton's comments, though he has frequently defended his decision to apply a different regulatory framework to brokers and advisors, noting that they operate under different business models.

"While the two standards are based on common principles, under the proposal, some obligations of broker-dealers and investment advisors will differ because the relationship models of these financial professionals differ," Clayton explained in written testimony. "But — importantly — the principles are the same, and I believe the outcomes under both models should be the same: retail investors receive advice provided with diligence and care that does not put the financial professional's interests ahead of the investor's interests."

But Warren argued that the standards the SEC is proposing are actually quite different, and that the "best interest" language is a sort of cover, behind which brokers and their firms would still be permitted to make dubious recommendations in pursuit of compensation.

She cited the study the SEC commissioned examining how average investors would interpret the disclosures envisioned in the proposed rules. That report found that consumers could read descriptions of brokerage and advisory practices and conclude that they were essentially the same type of business, Warren said.

"Look, we've had study after study after study that shows that pages of disclosures don't work," Warren said. "Now your own study reaches exactly the same conclusion. The inference I draw from this is we need a clear, uniform fiduciary standard for advisors and brokers."

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