House Republicans to SEC: Halt fiduciary duty rulemaking

GOP lawmakers want more thorough examination of impact of universal standard of care; where's the beef?

Mar 17, 2011 @ 6:50 pm

By Mark Schoeff Jr

Republicans on the House Financial Services Committee are urging the Securities and Exchange Commission not to promulgate a regulation that would impose a universal fiduciary duty of care for retail investment advice.

“It is our view that the Commission has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis upon which to move forward,” stated a March 17 letter from Rep. Scott Garrett, R-N.J., chairman of the capital markets subcommittee, and 13 of his GOP colleagues on the panel, to SEC Chairman Mary Schapiro.

The Republicans criticized a January SEC staff report, mandated by the Dodd Frank financial reform law, recommending that a universal fiduciary standard of care be required to better protect investors who it says are confused by the differing rules for investment advisers and broker dealers.

Currently, advisers must offer advice that is in a client's best interest, while broker-dealers adhere to a less stringent rule that says their guidance must be suitable for an investor's needs, timelines and risk appetite.

The Dodd Frank measure authorizes the SEC to proceed with rulemaking on fiduciary duty. But the House Republicans, underscoring the dissent to the report from Republican SEC Commissioners Kathleen Casey and Troy Paredes, wrote that “a much stronger analytical and empirical foundation than provided by the study is required” before the SEC writes a rule.

An SEC spokesman declined to comment on the letter.

The Republicans suggested that the SEC “conduct a thorough cost-benefit analysis that considers consumer preferences” and also “assess the broader practical impact” of a universal fiduciary duty on “the entire financial marketplace.”

They said that they intend to hold a hearing “in the coming weeks.”

In addition, the lawmakers told the SEC to consider how a universal standard of care would align with the fiduciary rule the Department of Labor is writing under federal retirement law.

They also said that the SEC must take into account the ramifications of a staff report on investment adviser oversight.

That study, also mandated by Dodd Frank and delivered in January, provides three recommendations to Congress to increase adviser examinations – authorize the SEC to charge user fees to fund the monitoring; establish a self-regulatory organization; or allow the Financial Industry Regulatory Authority Inc. to expand its jurisdiction to include advisers who are dually registered as broker-dealers.

An advocate for fiduciary duty maintained that the letter is not necessarily a defeat for him and his allies.

David Tittsworth, executive director of the Investment Adviser Association, noted that, like Ms. Casey and Mr. Paredes, the congressional Republicans did not explicitly state opposition to the idea of universal fiduciary duty.

“Nobody can read too much into this right now,” Mr. Tittsworth said. “The (fiduciary duty) issues have always been controversial. This underscores that they're going to remain controversial.”

In fact, Mr. Tittsworth said he is looking forward to a hearing, which might cover fiduciary duty as well as the potential for an adviser SRO.

“A hearing does not equal regulation,” he said. “It does not equal legislation. But it can take the issue to a different level.”

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