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.

+ Zoom
(Bloomberg)

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.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Upcoming Event

Jun 27

Webcast

Emerging Market Debt: 5 Forces at Work

When it comes to emerging market debt, there are a series of forces that help you drive better results for your clients. In today's continually changing market environment, it is critical to know the forces at play to help keep your investment... Learn more

Accepted for 1 CE Credit from the CFP Board. Approved by IMCA for 1 CIMA®/CIMC®/CPWA® CE credit. Approved for 1 CFA Credit.

Featured video

Events

Dynasty's Penney: How to stay ahead of the curve

With rapid evolution, financial advisers stand at a unique crossroads. Dynasty's Shirl Penney offers some simple strategies to remain a step ahead of the competition.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Interns will take on several roles at advisory firms this summer

College students are helping with client prep, firm visioning and long-term projects, among other duties.

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print