By Stephen W. Hall, Legal Director & Securities Specialist (appeared on Medium first)

Every American expects and deserves at least one thing from their broker: objective financial advice that serves their best interest. But that’s not what usually happens. Instead, for decades, brokers have been allowed to recommend investments that pad their own wallets with commissions and fees while saddling their clients with over-priced, underperforming products that cost tens of billions of dollars a year in lost savings, by extremely conservative estimates. Three months ago, the SEC finally proposed a rule that it said would solve the problem.

Unfortunately, the proposal is deeply flawed in every major respect.

The Commission rejected the idea of establishing a uniform fiduciary duty that would apply equally to all advisers — broker-dealers and investment advisers alike. And they didn’t even create a genuine “best interest” standard.

In reality, it is indistinguishable from the all too familiar suitability requirement that has allowed brokers to be influenced by conflicts of interest for years. The proposal has a long list of defects, but consider these top five fatal flaws:

• It establishes a so-called “best interest” standard that is actually nothing of the sort, since it allows brokers to put their interests on a par with their clients’ interest, as long as they go through certain motions, including drafting a policies and procedures manual and “mitigating” some but not all conflicts in unspecified ways;
• It fails to prohibit the worst conflicts of interest, like sales contests and bonuses, designed to make brokers hustle for every investment dollar they can extract from their clients;
• It relies far too much on disclosure, which simply cannot and will not adequately protect investors, especially since it allows key disclosures to be made at the time of a recommendation, leaving the average investor with little or no opportunity to make sense of the information and act upon it before being pressured into an investment decision;
• It gives brokers almost boundless discretion in how to comply with every aspect of the proposal, which is already extremely vague; and
• It offers an economic analysis that hardly deserves the name, as it literally ignores the billions of dollars in lost savings that conflicts of interest cost investors every year and side-steps the negative effects that such a weak rule will have on efficiency, competition, and capital formation.

Under this proposal, investors will undoubtedly continue to suffer huge losses from adviser conflicts of interest. Worse, brokers will be able to gain their clients’ trust by representing that they are complying with the SEC and acting in their “best interest,” when in reality, it will still be open season on the millions of Americans who need reliable, objective advice to navigate the complex world of finance and invest for a better future. And if finalized, the proposal will set a dreadfully low bar for the Department of Labor, as its new leadership decides how to rewrite its own fiduciary duty or best interest standard.

All of this is especially difficult to watch, since the proposal betrays the core mission of the SEC. The agency is supposed to be protecting investors and the integrity of the marketplace, not yielding to the brokerage industry and accommodating their desire to maintain the status quo and protect their business model.

It also flies in the face of an overwhelming body of evidence accumulated after years of study showing that adviser conflicts of interest cause immense financial harm to Americans. Numerous convincing studies — one conducted by the Commission’s own staff — have confirmed the abuses taking place and have urged the Commission to address the problem by imposing a strong and uniform fiduciary standard on all advisers.

Moreover, nearly a decade ago in the Dodd-Frank Act, Congress actually gave the Commission explicit authority to implement that standard. And the Department of Labor (“DOL”) under the prior administration even forged a navigable path, not only demonstrating the quantifiable and enormous financial toll that conflicts take on investors but also developing a strong best interest standard that protects investors while preserving the broker-dealer business model.

Against this backdrop, the SEC has lost a huge opportunity to do the right thing by American investors. The outcome will be tragic, unless the SEC takes a very different path.

We will continue to engage on this proposal, arguing strenuously that the SEC must make fundamental changes and improvements to the proposal so that any final rule actually protects investors from conflicts of interest rather than lulling them into a false sense of security.

Read Better Markets comment letter to the SEC here