Advisers, brokers in fiduciary-study rumble

Aug 18, 2010 @ 4:24 pm

By Mark Schoeff Jr.

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It's usually very quiet in Washington in August. But over at the SEC, the late-summer calm has given way to a loud din as lobbyists battle over the standard of care for investors.

The Aug. 30 deadline is quickly approaching for public input on the Securities and Exchange Commission's study of the fiduciary duty of brokers and that of investment advisers. Not surprisingly, groups on both sides of the debate have launched sizable campaigns to encourage their members to send comments to the agency.

In an alert to its federal coordinators, the National Association of Insurance and Financial Advisors offered arguments for its members to make in their letters. The arguments — which were also made during the debate over the financial-reform bill — include the assertion that the suitability standard is “robust and heavily enforced.” The letter also instructs members to tell the SEC that litigation would increase under a fiduciary duty and that any uptick in compliance costs would be passed along to clients.

“Contact the SEC and tell them you are regulated enough!” the NAIFA action alert states.

Exclamation points also dominate the action alert sent Aug. 17 by the Certified Financial Planner Board of Standards Inc. That group backs a single fiduciary standard for brokers and advisers.

In its note, the CFP Board argues that the differing standards for investment advice confuse and harm consumers.

“The SEC needs to know that a consumer-friendly fiduciary standard is good for the American public and good for your business!” the CFP alert states. “Let the SEC know that investors deserve clear standards that place their interests first above all those who give them investment advice!”

The CFP Board also provides a web link to a sample comment letter than a member can personalize. (View here.)

The NAIFA didn't offer an example letter.

(Comments have been streaming in over the last several weeks--read more here.)

When SEC Chairman Mary Schapiro opened the comment period in late July, she said the agency would attempt to solicit as much feedback as possible on fiduciary duty. She's getting her wish.

Jill Edwards, NAIFA's assistant vice president for federal-government relations, touted its outreach effort in an interview in early August, when she estimated that 70% of the SEC comment letters were from NAIFA members.

“All of the comments on the [SEC] website are individual and personal,” Ms. Edwards said. “Everybody is saying, ‘I'm drowning in regulations.' These are small businesses. That's how our members are different.”

Her claim appears to be supported by a review of the Aug. 11-12 submissions conducted by The Committee for the Fiduciary Standard. The group found that 93 of 98 letters were from brokers, as opposed to those seeking a universal fiduciary duty.

Consumer advocates are also jumping into the fray. The Consumer Federation of America issued a statement Aug. 16 urging individual investors to weigh in on the SEC study.

Among the questions the group suggested that investors address: “Do investors understand that these financial professionals are subject to different legal standards with regard to their obligations to customers when they recommend securities? Do investors believe that all those who market themselves as advisers and offer personalized advice should have to act in the best interests of their customers?”

The SEC must deliver the study to the Congress by January. Under the financial-reform bill passed last month, the agency then has the option to write a regulation that would establish a universal fiduciary duty for personalized retail investment advice.

Currently, investment advisers operate under such a rule, which requires that they act in the best interests of their clients and disclose all material conflicts of interest. Broker-dealers must adhere to a suitability standard that ensures that investments meet a client's needs and timeline.

The stakes are high for groups on both sides of the debate. They regard the SEC study as pivotal in determining what step the agency takes next.

In fact, NAIFA cites the SEC review among its victories in the financial-regulatory-reform bill – along with language that states that charging commissions and selling proprietary products are not necessarily fiduciary breaches. In addition, the bill says that broker-dealers would not have a continuing fiduciary duty after the completion of a sale.

But Thomas Currey, NAIFA president, anticipates that the SEC will move to fiduciary rulemaking.

“We just hope it is enlightened by the study they're undertaking,” Mr. Currey said. “This one-size-fits-all fiduciary standard isn't the way to go about it.”

But CFP members disagree — and are letting the commission know it.

“We want to make sure the foundation is laid in the study to lead to the inescapable conclusion that the SEC must establish a broad fiduciary standard of care for the delivery of personalized investment advice for broker dealers,” said Marilyn Mohrman-Gillis, the CFP Board's managing director of public policy and communications. “It's not just sitting down and cranking out a comment letter; this is a heavy-duty undertaking.”

Maybe so, but members on either side of the argument seem to be cranking out plenty of letters. As of Aug. 16, the agency had received 1,236 comments. Another 208 comments had been submitted in form letters.

The SEC is not certain how many staff members will be assigned to wade through the comments. But the agency vows to give each letter due consideration. “We read them all,” said John Heine, an SEC spokesman.


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