Reps willing to bear 'substantial costs' of fiduciary duty: SIFMA exec

But SEC must provide brokers with specific guidelines on how to comply, says Carroll

Jun 13, 2013 @ 6:19 pm

By Mark Schoeff Jr.

Brokers are willing to bear the cost of stronger investment-advice standards, as long as regulators also tell them how to meet the higher bar, according to a leading Wall Street trade organization.

The Securities and Exchange Commission is considering whether to require brokers to act in the best interest of their clients when providing retail investment advice – a more stringent requirement than the suitability rule that currently governs sales of financial products.

Kevin Carroll, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said that the benefit of a higher standard is “self-evident.”

“You don't need further economic proof to establish that point,” Mr. Carroll said on Thursday at the TD Ameritrade Institutional Fiduciary Leadership Summit in Palm Beach, Fla.

He acknowledged that imposing a uniform fiduciary standard would make compliance more expensive for brokers. “We're largely willing to accept a certain cost, probably a substantial cost, in order to establish this uniform standard,” Mr. Carroll said.

He cautioned, though, that the SEC must define how brokers can meet a fiduciary standard within their business model -- which is highlighted by an “episodic” rather than “continuous” relationship with clients, non-discretionary control over their accounts and the mandate to managing conflicts of interest rather than avoid them.

“What we're saying is articulate the existing fiduciary duty through rules,” Mr. Carroll said. “We need guidance on how an episodic fiduciary duty will work.”

The points that Mr. Carroll made will likely be reflected in a SIFMA comment letter to the SEC next month. On March 1, the agency released a request for information for a cost-benefit analysis of a potential fiduciary-duty rule. The deadline is July 5.

The Dodd-Frank financial reform law gave the SEC the authority to establish a uniform fiduciary duty standard. The agency said that it will use the cost-benefit study to determine whether to propose a rule.

Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc., warned that the SEC may go too far in accommodating brokers. “If the SEC continues to try to mold the fiduciary standard so that it works with all broker-dealer business practices, we believe, by definition, it will be a watered-down standard,” Ms. Mohrman-Gillis said at the conference.

Don Trone, president of the Leadership Center for Investment Stewards, said that the cost-benefit analysis the SEC is undertaking will be a challenge because of the sharp difference between the broker and adviser standards. “Suitability and fiduciary are asymmetrical,” Mr. Trone told conference audience.

He cautioned against the type of rules-based approach that Mr. Carroll advocates. “Never in the history of civilization have more rules improved the behavior of society,” Mr. Trone said.

He said that broker concerns could be addressed by “safe harbor” provisions in a uniform fiduciary standard.

Mr. Carroll is confident that brokers will continue to be able to engage in one activity that advisers don't practice – principal trading.

“The SEC is probably heading in that direction,” he said.

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