Securities and Exchange Commission Chairman Jay Clayton told CNBC on Thursday the agency's new rules on conflict of interest will force brokers to have "very candid" conversations with investors.
The SEC's rule, the Regulation Best Interest, was approved in a 3-1 vote Wednesday. Stockbrokers will be required to disclose any potential conflicts of interests when they give investment advice. It also bans sales contests among broker-dealers and quotas that reward brokers who generate the highest sales of certain products.
"We're raising the standard of conducts for broker-dealers," Clayton said in a "Squawk Box" interview. "You're going to have to be very candid with your investor."
The SEC's measure, proposed more than a year ago, was supported by the broker-dealer industry but opposed by consumer and investor advocates. Supporters say it will be an improvement over current standards, which require brokers only to make sure an investment is "suitable" for a client. Critics say the new measure doesn't go far enough to protect investors from abuses. About 43 million American households have a retirement or brokerage account.
Clayton said the old standard was not substandard but also wasn't "clear enough." When asked whether this new rule would stifle innovation in the brokerage space by adding unexpected regulatory expenses, Clayton said, "No."
"You do a good job managing money, you should get paid," said Clayton, a former Wall Street lawyer who was picked by President Donald Trump to run the SEC in 2017.
"What investors need to know is how much of their money is going to work for them," he added. "The key part of this rules package is whether you're an investment advisor or a broker-deal, you're going to have to be very candid with how you're making your money."
Regulation Best Interest and the new relationship summary form will become effective 60 days after they are published in the Federal Register. The compliance date is June 30, 2020.
—CNBC's Sarah O'Brien and AP contributed to this report.