Fiduciary battle moves to SEC

The battle over whether stockbrokers should be more accountable to individual investors likely will shift this week from Capitol Hill to the SEC.

The massive financial-regulatory-reform bill that the Senate is expected to approve any day would empower the Securities and Exchange Commission to write a rule that would require broker-dealers and insurance agents providing financial advice to act in the best interests of their clients and disclose any conflicts.

First, though, the SEC would have to conduct a comprehensive study looking closely at the differences in oversight between broker-dealers and investment advisers. The commission would have six months after the enactment of the financial reform bill to complete its review.

Over that time period, groups on both sides of the contentious fiduciary debate would be expected to lobby the SEC in hope of exerting influence over the rulemaking process. Indeed, some are already thinking ahead to meeting with commissioners, and drafting detailed comment letters on how they think the rule should be written.

“Our attention has to focus very quickly on the SEC study and any subsequent rulemaking,” said David Tittsworth, executive director of the Investment Adviser Association.

“Rulemaking is less visible,” said Blaine F. Aikin, chief executive of Fiduciary360 LLC, a company that trains advisers in fiduciary matters.

“It’s certainly subject to a great deal of lobbying pressure,” he said. “Fiduciary advocates can by no means declare victory.”

Making a case to the SEC is different than lobbying members of Congress.

The commission tends to be “lawyerly,” while Capitol Hill is “more political,” according to Mr. Tittsworth. That means that the SEC is more likely to be influenced by a handful of expert letters than by hundreds of form letters signed by individual investors.

Meeting with commissioners can also be productive.

Dale Brown, president and chief executive of the Financial Services Institute Inc., said that his group has talked with SEC Chairman Mary Schapiro and the other four commissioners, as well as division heads, over the past two months about a variety of issues, including fiduciary duty.

“The key is to be smart about the right time to call on our members to communicate directly with the SEC,” said Mr. Brown, whose group comprises 188,000 independent broker-dealers and independent financial advisers.

The FSI isn’t opposed to a universal fiduciary standard but wants to ensure that the SEC takes into account the suitability standard under which broker-dealers already operate. Suitability requires brokers to assure that a product is appropriate for a client’s investment needs and timeline; it allows brokers to sell products from their own inventory.

Other groups that undoubtedly will weigh in with the SEC include the Financial Planning Coalition, which comprises the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors. The coalition, which has 75,000 members, has been a staunch proponent of a universal fiduciary standard.

Then there is the Committee for the Fiduciary Standard, which boasts 800 members.

Before the lobbying effort begins, the final bill must be signed into law by President Barack Obama. Democratic leaders originally had hoped that that would happen by July 4.

The House passed financial reform 237-192 on June 30.

The Senate was supposed to approve the bill, which touches on every facet of the financial industry, later that week. That timeline was upended by the death of Sen. Robert Byrd, D-W.Va., on June 28.

His death reduced the Senate Democratic caucus to 58 members, two short of the number required to overcome a filibuster.

The original Senate bill was approved 59-37, with two Democrats voting against it and four Republicans in favor. One Democrat originally opposed now supports the final bill, as does one Republican who favored the original bill.

In an extraordinary move, the House-Senate conference that spent two weeks last month melding each chamber’s version of reform into the final bill reopened its negotiations briefly to remove a $19 billion tax on large banks in an effort to appease wavering Republicans.

Most observers expect the bill to gain Senate approval because financial reform is a political priority for Democrats. Once the bill becomes law, the clock will start ticking on the six-month SEC fiduciary study.

The SEC is sure to hear from hundreds of people about fiduciary duty alone. But it is only one study and rulemaking among dozens that the SEC would have to perform under the financial-reform bill.

“I question whether the SEC can do a thorough job in six months, especially when you think about everything else they’re going to have to do in a 2,000-page bill,” Mr. Tittsworth said.

E-mail Mark Schoeff Jr. at [email protected].

Related Topics: Money Management Institute (MMI), Securities and Exchange Commission