SEC rules to protect investors from brokers (with conflicting economic incentives) relies heavily on disclosure of these conflicts. However, some academic research raises questions about the impact of increasing disclosure where parties’ interest may conflict. Significantly, conflicted advisors may provide more biased advice (to offset the impact of the disclosure) and customers may not adequately assess or consider the nature of the conflict.

The SEC has finalized rules governing the behavior of broker-dealers. Under this rule broker dealers need to (i) provide investors with additional disclosure regarding fees, services and conflicts of interest and (ii) use care and diligence to develop a reasonable belief that a recommendation is in the “best interest” of the customer and not place the interest of the broker dealer “ahead of” the interest of the customer.

The SEC has proposed new rules governing the behavior of broker-dealers. Under this proposal a broker- dealer “shall act in the best interest of the retail customer . . . . without placing the financial or other interest of the [broker-dealer] ahead of the retail customer.” The primary requirements of “best interest” are that broker-dealers disclose fee structures and not place their financial interests ahead of customers’ interests.