This article originally appeared on Advisor Perspectives.

What do social distancing and lockdowns have to do with new SEC and CFP Board standards that will be enforced June 30?

Unfortunately, a lot.

Both deal with a deadly virus: one, the coronavirus; the other, a conflict-of-interest virus. In 2012, SEC official Carlo V. di Florio called conflicts a virus that are a mortal threat. Containing the coronavirus is based on a mitigation strategy; defeating the conflicts virus, the new standards suggest, will be through notoriously ineffective disclosures.

This is the backdrop for an Institute paper we released April 15 on the importance of the new SEC and CFP Board standards. The paper reviews the standards through a lens of ‘Principles rejected, principles embraced.’

The new standards abandon the principles of the Investment Advisers Act of 1940. Those principles are based on the different roles, functions and purposes of investment advisers versus broker-dealers.

The SEC and CFP Board standards are striking for their similarities. Each seeks to avoid constraints placed on advice by legal precedent and commonsense. Each seeks to transform standards and to rebrand conflicts. In 2020, conflicts are treated more like the common cold than a deadly virus.

Advisers, brokers and their conflicts – opaque sales commissions and transparent fees – are treated alike. But for sales contests and the like, conflicts need not be avoided.

Indeed, eliminating conflicts is not even urged.

The implicit message is this: Conflicts are okay. The explicit message: Broker compensation comes first.

The SEC states, “We were concerned that the absolute elimination of specified conflicts could mean a broker-dealer may not receive compensation for its services.”

The SEC’s Form CRS makes brokers, advisers and their conflicts appear the same. Advisers and brokers are described as largely indistinguishable. This is seen in the required language for a dual registrant:

When we provide you with a recommendation as your broker-dealer, or act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations and investment advice we provide you.

What are the implicit overarching principles of the new standards? Here are five: the Advisers Act principles are irrelevant; brokers are, as former SEC Chair Schapiro suggested in June 2009, just like advisers; more choices of conflicted recommendations is good; conflicts don’t matter; and, fifth, disclosures protect investors.

Each principle is widely known as untrue. But, never mind. The unstated premise matters: brokers are the unsung heroes of retail investors.

The story of new standards vanquishing the Advisers Act is a tale of a seismic shift in power from advisers to brokers. The standards should evoke the proverbial slap in the face for defying principles in history, law and logic.

They defy commonsense in the Advisers Act with gusto. Here’re three ways: common sense says conflicts are important; brokers and advisers are different; and, differences in conflicts matter. Forget it. That was 1940. It’s 2020.

Broker-dealers will continue reporting, as Merrill Lynch did recently, their new Reg BI policies in the weeks ahead. The question is whether changes are at the edges and minimal, or central and substantive.

One report details Merrill’s efforts to improve how brokers record conversations with customers and disclose conflicts. Disclosures are notoriously ineffective, often deserving an “F” grade. Merrill could make a difference. Re-engineering disclosures and consents could raise the “F” a lot. Time will tell.

The coronavirus is being contained. Barring a court, regulatory or industry intervention, the conflicts virus is incubating and about to be unleashed.

The SEC campaign continues. The April 2 SEC announcement to keep the June 30 enforcement in place blasts the headline: “Investors Remain Front of Mind at the SEC,” and, “Financial professionals are required to never put their interests ahead of the interests of their clients and customers.” Again, time will tell.

Download a PDF copy of this article here.