Fiduciary issue attracts SEC interest

The fiduciary issue now appears to be on the Securities and Exchange Commission's agenda as part of an overall reassessment of the regulations covering broker-dealers and investment advisers. The review also is likely to include assessing whether all advisers should come under a self regulatory organization such as the Financial Industry Regulatory Authority Inc. of New York and Washington.

Commissioners are starting to talk about adopting fiduciary standards."The question that ought to be asked of broker-dealers that give advice [is], how should they be treated?" commissioner Luis Aguilar said.

"It's fair to say that the highest standard is that of fiduciary. That would be an appropriate standard to apply to others who are providing the exact same services," said Mr. Aguilar, who became one of the agency's five commissioners last year.

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Luis Aguilar: "The question that ought to be asked of broker-dealers that give advice [is], how should they be treated?"

"We need to look at whether we really need two registration categories," she said. "The rules that apply to someone ought to depend on what they're doing, not what they call themselves and not necessarily on how they charge people."

While Ms. Walter does not explicitly call for imposing a fiduciary standard over all financial advisers, she said: "I have a fair amount of sympathy for that."

The fact that two commissioners are focusing attention on adviser and broker regulation — coupled with likely congressional action on financial regulatory reform — increases chances that the SEC and Congress will deal with the issue this year.

The recent massive fraud cases brought against Bernard L. Madoff Securities LLC of New York and the Houston-based broker-dealer and investment advisory firms owned by Robert Allen Stanford have put pressure on the SEC.

SEC Chairman Mary Schapirohas not taken a position on the issue, according to agency spokes-man John Nester. But in October, when she was chief executive of Finra, she told attendees at the annual conference of the American Council of Life Insurers in Boston that "consumers of financial products and services must receive the same level of protection regardless of the product or service that they purchase."

As government resources shrink, "private-sector regulation has an essential role to play," Ms. Schapiro told the insurance executives. "Independent non-governmental regulators such as Finra can dedicate enormous resources to investor protection."

Even without congressional action, the SEC has the authority to require financial advisers to come under an SRO, said Jonathan Katz, who was secretary of the SEC from 1986 until 2006 and who recently wrote a report for the U.S. Chamber of Commerce on how the SEC could operate more efficiently.

Alternatively, Finra has the authority to adopt regulations that would establish fiduciary standards for broker-dealers, Mr. Katz said. "Everybody agrees that's the right way to go," he said.

The Financial Planning Association of Denver and the National Association of Personal Financial Advisors of Arlington Heights, Ill., have called for requiring all financial advisers to follow a fiduciary standard, which is more strict than the suitability standard that applies to brokers.

But winning support for a universal fiduciary standard, which carries greater legal liability, will be difficult. In December, State Farm Mutual Automobile Insurance Co. of Bloomington, Ill., ordered its 270 independent-contractor agents to relinquish their designations as certified financial planners because the Washington-based Certified Financial Planner Board of Standards Inc. imposed a fiduciary standard this year for its CFP designees.

"Our concern lies with the CFP Board defining the financial planning engagement in a way that potentially subjects the sale of all financial services and insurance products to the same fiduciary standard," State Farm spokesman Dick Luedke wrote in an e-mail, noting that agents holding the designation would have been "subjected to a standard that does not exist for other agents."

State Farm's withdrawal of support for "our standards of professional conduct is unfortunate, and we think it comes at the wrong time," said Kevin Keller, chief executive of the CFP Board. No other companies have withdrawn their support for the CFP certificate, Mr. Keller said.

If it were strictly adopted, a fiduciary standard would make it difficult for brokers to conduct principal trades or selling securities from their broker-dealer's inventory. That would be a blow to the business model of broker-dealers with large retail operations.

Currently, dually registered broker-dealer and investment adviser firms are allowed to conduct principal trades as long as disclosures are made to clients about possible conflicts of interest. But that SEC temporary rule expires at the end of the year.

Tom Bradley, president of TD Ameritrade Institutional of Jersey City, N.J., supports requiring all advisers to act as fiduciaries. "Absolutely, with strict rules around best execution, I believe that we can deal with that issue," he said.

E-mail Sara Hansard at shansard@investmentnews.com.