SEC's Schapiro stumps for single standard of care – but what will it be?

Despite commission boss' backing of tough uniform fiduciary standard, compromise remains a possibility

Jul 9, 2010 @ 1:25 pm

By Mark Schoeff Jr.

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Securities and Exchange Commission Chairman Mary Schapiro indicated today that she is ready to impose a universal standard of care on anyone who provides investment advice to retail clients.

In a speech to the Society of Corporate Secretaries' national conference in Chicago, Ms. Schapiro praised the sweeping financial regulatory bill making its way through Congress, which gives the SEC the power to harmonize the differing fiduciary rules that govern investment advisers and broker-dealers.

“I have long advocated such a uniform fiduciary standard and I am pleased the legislation would provide us with the rulemaking authority necessary to implement it,” Ms. Schapiro said, according to prepared remarks released by the agency.

Her backing of a single standard seems to confirm the prediction of Rep. Barney Frank, D-Mass., that the SEC will indeed mandate a single standard of care for broker-dealers and investment advisers. “We gave the SEC the power to do it,” the Massachusetts Democrat said during floor debate on June 30. “And they're going to do it.”

The fiduciary duty provision in the bill requires the SEC to conduct a six-month study of the differences in oversight of investment advisers and brokers.

More importantly, it permits the regulator, if it so chooses, to promulgate a regulation that would subject broker-dealers to the same ‘best-interests' standard of care that applies to investment advisers. Currently, broker-dealers must meet a less-stringent suitability standard, which means suggested investments must be appropriate for a client's needs and timeline.

The Senate may act on the financial reform legislation next week, when Congress returns from its Independence Day recess.

Most observers expect the bill to get through the Senate, although the vote has become a cliffhanger. Among its many controversial provisions, the legislation creates a mechanism for liquidating large institutions that pose a systemic threat to the economy, establishes a new consumer protection agency and imposes new rules for derivatives trading.

If the bill passes the Senate, and President Barack Obama signs the measure into law, the SEC can begin work on a long list of studies and rulemakings emanating from it.

Ms. Schapiro's comments in Chicago notwithstanding, there is no guarantee that the SEC will impose a universal fiduciary duty. For one thing, the agency must incorporate findings from the study in any new rule.

Broker-dealer groups say that the study will provide an opportunity to demonstrate the extent to which the sector is already regulated. In fact, they say that broker-dealers are more closely and consistently scrutinized than investment advisers.

“On the investment adviser side, there's considerably less rigor,” said Dale Brown, president and chief executive of the Financial Services Institute. “That gap has to be closed for real regulatory reform.”

In fact, it's conceivable that the SEC could craft a single standard of care that falls somewhere in between ‘suitability' and best interests.' For example, the provision as written would allow broker-dealers to charge commissions and sell proprietary products while not holding them to a continuing standard of care after the sale.

But one expert says the provision in the financial reform bill is written in such a way that it encourages the SEC to raise the bar on fiduciary duty.

“There's a pretty strong argument that the standard of conduct would be the investment advisor standard,” said David Tittsworth, executive director of the Investment Adviser Association.

Nevertheless, fiduciary standard advocates aren't taking anything for granted. Barbara Roper, director of investor protection for the Consumer Federation of America, believes that Ms. Schapiro and the SEC commissioners would like to establish a universal fiduciary duty. She's less convinced about others at the agency.

“For this to work, [the commissioners] are going to have to ride herd on the staff,” Ms. Roper said. “The SEC staff has snatched defeat from the jaws of victory on this issue more than once.”


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