Bogle, Levitt, Volcker look to get fiduciary rule back on track

Index fund pioneer John Bogle, former Securities and Exchange Commission Chairman Arthur Levitt and former Federal Reserve Board Chairman Paul Volcker will be among those lending their signatures to an effort to revive a stalled initiative that would strengthen investment advice rules.

On Sept. 11, the Institute for the Fiduciary Standard will present a “Fiduciary Declaration” to SEC Chairman Mary Schapiro urging the commission to move forward with a rule that would impose the fiduciary standard mandated by the Investment Advisers Act of 1940 on anyone providing retail investment advice.

The Dodd-Frank financial reform law gave the SEC the authority to promulgate such a regulation. The SEC delivered a report to Congress in January 2011 with several recommendations but hasn't issued a proposal.

“Right now, it seems to be a good time to remind the key parties of the importance of the fiduciary standard and that there are actions that can be taken to go forward with it,” said Knut Rostad, president of the Institute for the Fiduciary Standard and the compliance officer at Rembert Pendleton Jackson LLC.

The group didn't release the declaration, which also could prod the Labor Department to re-propose a rule mandating that all advice given to participants in retirement plans fall under a fiduciary standard. The original proposal was withdrawn after meeting stiff resistance from the financial industry.

COST-BENEFIT ANALYSIS

The SEC has indicated that it won't proceed with its fiduciary- duty rule until it conducts a cost- benefit analysis.

The SEC has developed an outline of a potential rule — similar to a concept release — that would serve as a foundation for a data request for the analysis. SEC commissioners have not yet approved it for public release.

The SEC and the Labor Department must increase advice standards to restore investor confidence in the markets, according to Mr. Rostad.

Under a fiduciary duty, a client's best interests must come before the adviser's.

“We are beyond a normal pendulum swing in distrust,” Mr. Rostad said. “We should be talking about investor disgust as much as investor mistrust,” he said. “That piece of it sometimes does not get the right amount of attention.”

The Securities Industry and Financial Markets Association supports a universal fiduciary duty but is wary of Mr. Rostad's initiative, which it sees as an effort to force the requirement of the 1940 law on brokers. They meet a less stringent suitability standard when selling financial products.

“That's the seemingly simple solution,” Kevin Carroll, SIFMA managing director and associate general counsel, said of extending the 1940 law.

“That's good for investment advisers,” he said. “It just doesn't work for brokers.”

SIFMA submitted a fiduciary framework to the SEC last year that it hopes will help guide the commission in writing a universal fiduciary standard. The Consumer Federation of America filed its own fiduciary outline this year.

Sorting through the ideas could be slowing down the commission.

“The SEC understands that it has to take a careful, deliberative approach to establishing a universal fiduciary standard that preserves the choice and access [to advice] that current brokerage customers enjoy and expect to continue to enjoy,” Mr. Carroll said.

“The devil is in the details,” he said. “That's why, I suspect, it's taken longer than anyone reasonably anticipated.”

The National Association of Insurance and Financial Advisors also is concerned about how a universal standard of care would affect the registered representatives who make up much of its membership.

“It seems a vocal group of people has reiterated their support for a universal fiduciary, but very few of them are saying what that would mean in practice,” NAIFA president Robert Miller said in a statement.

“NAIFA supports the SEC in their effort to conduct a thorough cost-benefit analysis to determine the potential impact on middle-market investors and the economy if a uniform fiduciary duty were to be imposed,” he said.

The regulatory pace will probably provide lots of time for the debate to continue even after September.

“Given where we are in the calendar and the election, the reality is that [a fiduciary rule] is not likely to happen this year,” Mr. Rostad said. “We will be in a position of starting over next year, possibly with a new [SEC] chairman and new commissioners.”

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Related Topics: Securities and Exchange Commission