A rising leader on the Senate Banking Committee today pushed the Securities and Exchange Commission to advance a regulation that would subject brokers to an investment advice standard.
“I would encourage the commission to make this a priority because I think there is an absolute benefit to investors,” Sen. Jon Tester, D-Mont., told SEC Chairman Elisse Walter at a hearing on implementation of the Dodd-Frank financial reform law.
Mr. Tester recently was appointed chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment.
The SEC is working on a cost-benefit analysis that would help shape a rule imposing a uniform fiduciary duty for anyone providing retail investment advice. Ms. Walter said that a formal request for information from investors, experts and market participants will be released “in the next month or two.”
Dodd-Frank gave the SEC the authority to promulgate a fiduciary-duty regulation but did not mandate it. An SEC study required by the act recommended such a rule because it would better protect investors confused by the varying standards of care provided by financial professionals.
But for the last year, the SEC has not been able to get the request for a cost-benefit-analysis out the door. One reason is that the SEC is swamped by nearly 100 mandatory Dodd-Frank rules. In addition, the advice standards regulation has split the commission.
“I would love to move forward on this issue as soon as possible,” Ms. Walter told Mr. Tester. “Opinions at the commission vary a great deal in terms of potential costs. My own personal view is that it's the right thing to do, and we should proceed [and] perhaps at the same time take a hard look at the different rules that are applicable to the two different professions — investment advisers and broker-dealers — and see where they should be harmonized.”
Investment advisers must act in the best interests of their clients when providing investment advice. Brokers meet a less stringent suitability standard requiring that products they sell fit an investor's needs and risk appetite.
David Tittsworth, executive director of the Investment Adviser Association, was cautious in interpreting the exchange between Mr. Tester and Ms. Walter. Mr. Tittsworth is worried that “harmonization” of investment adviser and broker rules might lower advice standards.
“We're concerned about the potential for a new and different standard that would be less protective of all investors than the well-established fiduciary duty under the Investment Advisers Act,” Mr. Tittsworth said.
Mr. Tittsworth asserted that the Securities Industry and Financial Markets Association and other groups are advocating a “watered-down version of the existing fiduciary duty.”
While supporting uniform fiduciary duty, SIFMA also has urged the SEC to be careful in implementing a rule.
“SIFMA in no way is looking for a watered-down anything,” said Ira Hammerman, SIFMA's general counsel. “The SEC as the expert agency needs to roll up its sleeves and define for the first time what a fiduciary standard of care is and provide clear guidance on how a multiservice financial institution can comply with that fiduciary standard of care and service its customers.”
One organization skeptical of fiduciary duty said that the cost-benefit analysis will provide important guidance. The National Association of Insurance and Financial Advisors asserted that there is no proof that a fiduciary standard is better than suitability.
“NAIFA is worried that a poorly conceived or implemented regulation could end up hurting the consumers it is supposed to benefit, especially if it increases costs or limits access to financial services for middle-market investors,” NAIFA president Rob Smith said in a statement. “NAIFA looks forward to working with the SEC and contributing to the cost-benefit analysis however we are able.”
Even if the SEC gets the regulatory-impact review under way soon, it could be months before any conclusions are drawn — and then months more before a rule is proposed.
“We'll see what sort of input we get, and then we'll see how we can move forward with fiduciary duty and/or harmonization, both of which I think are quite important,” Ms. Walter told reporters after the hearing.
Over the next few weeks, the agency also could get a new chairman. Mary Jo White, a former U.S. attorney and Wall Street defense lawyer, recently was nominated by President Barack Obama.
“An issue as important as a fiduciary standard of care will require her involvement to get it jump-started in the agency,” Mr. Hammerman said.