Fiduciary advocates make push for new rules

May 15, 2011 @ 12:01 am

By Mark Schoeff Jr.

Advocates for imposing a universal fiduciary duty on anyone providing retail investment advice are stepping up their campaign to urge the SEC to move forward with a rule.

House Financial Services Committee Republicans are using the majority status they obtained in last fall's elections to try to shape and slow down implementation of the massive Dodd-Frank financial reform law. Fiduciary advocates are worried that momentum for a fiduciary rule is being enervated.

“We're concerned for the short term that the overwhelming resistance from the industry could put things on hold,” said Knut Rostad, chairman of The Committee for the Fiduciary Standard, and regulatory and compliance officer at Rembert Pendleton Jackson Investment Advisors.

The Financial Planning Coalition last Thursday called on the Securities and Exchange Commission to push ahead with the fiduciary rule. The group is encouraging planners and other investment advisers to sign a petition to demonstrate support for the issue.

Days earlier, the Consumer Federation of America sent a letter to the Financial Services Committee rebutting arguments made principally by the National Association of Insurance and Financial Advisors that applying the fiduciary standard to broker-dealers would increase their compliance costs significantly and force them to curtail services to middle-income investors.

In March, Republicans on the House Financial Services Committee asked the SEC to delay issuing a fiduciary rule until the agency conducts a cost benefit analysis. The panel's Capital Markets Subcommittee will hold a hearing in July regarding the fiduciary study, according to an aide to a committee member.

Senate Banking Committee Republicans last week joined their House colleagues in emphasizing the need for further assessment of how Dodd-Frank regulations will affect the economy. They asked inspectors general at the financial regulators to review the economic analyses being done by the agencies.


Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, said that GOP insistence on a cost benefit analysis is a delaying tactic.

“It's an excuse for being opposed to it,” Mr. Frank said last Wednesday at a Capitol Hill news conference.

The Dodd-Frank law authorized — but did not require — the SEC to promulgate a fiduciary-duty regulation after completing a study. The SEC delivered a report to Congress in January that recommends that broker-dealers be subject to the same standard of care as investment advisers — acting in a client's best interests — in order to protect investors.

But the report drew dissent from the two SEC Republican commissioners — Kathleen Casey and Troy Paredes — who asserted that its conclusion required a “stronger analytical and empirical foundation” ensuring that investors would not be harmed by the regulatory change.

In an appearance at an Investment Company Institute conference in Washington on May 6, SEC Chairman Mary Schapiro said the agency would “explore the possibility of rulemaking” sometime after July 21, the first anniversary of Dodd-Frank.

“In the meantime, I've asked our economists to try to gather as much economic data as possible to help inform whatever rule we propose,” Ms. Schapiro said.


NAIFA cites the call for more economic analysis on fiduciary duty as evidence that the SEC study was flawed.

The organization said that its 200,000 members already spend about $8,878 annually on compliance under the existing standard.

If those costs increase 15% under a fiduciary standard, 65% of its 200,000 members will shift their business to wealthier clients, stop offering securities, start charging fees or increase their fees, according to a LIMRA survey last year. Such moves would hurt the 58% of NAIFA clients who have household income of less than $100,000.

“The Consumer Federation of America's claim that the fiduciary standard of care provides better protection for consumers is a myth,” NAIFA President Terry Headley said in a statement. “The suitability standard is robust and heavily enforced. A suitability standard is rules-based and objective, as opposed to fiduciary, which is process-oriented and subjective.”

In a May 9 letter to the House Financial Services Committee, Barbara Roper, director of investor protection for the consumer group, implied that NAIFA is throwing sand into the regulatory gears.

“Unfortunately, a relatively small but highly vocal portion of the broker-dealer community continues to attack the SEC proposal on the grounds that it would harm middle-income and rural investors,” Ms. Roper wrote. “We are concerned that arguments with so little basis in fact appear to be persuading some members to advocate a go-slow approach on this top protection priority for retail investors.”

Congress — and a couple SEC commissioners — will continue to look for more data while both sides of the debate make general economic arguments.

“An effectively enforced fiduciary duty could save investors tens of billions of dollars a year in excess costs and reduced payouts by forcing brokers to make recommendations based on the best interests of the investor rather than their own bottom line,” Ms. Roper wrote in her letter.

E-mail Mark Schoeff Jr. at


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