July 20, 2018

Warren, Booker, Brown Press FINRA for Interpretation of SEC's Proposed Standards of Conduct Rule

Senators Raise Concerns about Rule's Ambiguity, Inadequate Protections Against Conflicts of Interest

Text of the Letter (PDF)

Washington, DC - Today, United States Senators Elizabeth Warren (D-Mass.), Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio) sent a letter to the Financial Industry Regulatory Authority (FINRA) requesting that the organization provide its interpretation of the Security and Exchange Commission's (SEC) proposed standards of conduct rule. In their letter to FINRA President and Chief Executive Officer Robert W. Cook, the Senators expressed concern that the rule, which FINRA will play a large role in implementing and enforcing, would not adequately protect investors or guarantee that brokers put their clients' interests ahead of their own.

The SEC's rulemaking package, which it released in April to address the standards of conduct for investment professionals, is now open for public comment.  FINRA, which is the primary regulator of the brokerage industry, will be largely responsible for implementing the rule, both through its arbitration forum and its own disciplinary actions against broker-dealers. 

In their letter, the Senators criticized the proposal's ambiguous "Best Interest" standard and raised concerns about its ability to adequately address harmful conflicts of interest in the brokerage industry. "Despite its title implying a much more stringent standard, this proposal is unlikely, for several reasons, to give investors the peace of mind they deserve that the advice they are receiving is truly in their best interests," the Senators wrote.  They pointed out that the SEC Commissioners have developed remarkably different interpretations of what exactly the rule would require with regards to brokers' potential conflicts of interest.

The Senators' letter also noted the importance of FINRA's interpretation of the proposal in understanding its potential impact. "Whether or not it will fulfill the SEC's stated goal of raising the standard of conduct for broker-dealers may depend largely, if not almost entirely, on the way that FINRA interprets the rule and applies it in its disciplinary actions and arbitration proceedings," the Senators continued. "In other words, billions of dollars in middle-class Americans' hard-earned savings-which families need to buy a house, send a child to college, or retire in old age-may depend on how you understand and implement the SEC's rule."

The Senators' letter asks a series of questions related to FINRA's interpretation of the proposal before the end of the proposal's public comment period on August 7, 2018. 

The letter follows a statement issued by Senator Warren in April expressing her concern that the proposal would do little to eliminate conflicts of interest and protect working families from conflicted investment advice.