SIFMA tells SEC that fiduciary standard would cost a bundle

Jul 7, 2013 @ 12:01 am

By Mark Schoeff Jr.

Kevin Carroll
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Kevin Carroll (Vincent Ricardel)

A leading Wall Street trade organization told the Securities and Exchange Commission last week that raising investment advice standards for brokers would force individual firms to spend millions of dollars to upgrade their compliance systems.

The companies are willing to absorb the increased costs as long as new rules are written to accommodate the brokerage business model, according to the Securities Industry and Financial Markets Association.

In a letter SIFMA sent to the SEC last Friday, the organization said that nine of its member firms estimated that it would cost each of them $5 million annually to upgrade their compliance, supervision and training systems.

Another seven firms estimated that if brokers were to adopt disclosure forms similar to those that investment advisers use at the beginning of a client relationship, it would cost about $3 million per firm annually.


The SIFMA letter was in response to an SEC request for information for a cost-benefit analysis the agency is conducting of a potential uniform fiduciary standard for retail investment advice. The deadline for comment letters was last Friday. The agency will use the regulatory impact study to determine whether to proceed with a rule.

The Dodd-Frank financial reform law gave the SEC the authority to require that anyone providing advice act in their clients' best interests, the fiduciary standard that investment advisers already meet. Brokers currently adhere to a less stringent suitability standard that requires that investment products they sell fit an investor's financial needs and risk profile.

“We remain broadly supportive of pursuing a uniform fiduciary standard,” Kevin Carroll, SIFMA's associate general counsel, said in an interview last week previewing the SIFMA letter. “The cost estimates don't change that view.”

He added that if the SEC promulgates a fiduciary-duty rule, “the standard needs to be established in an appropriate manner that recognizes the differences in the broker-dealer business model.”

The Investment Advisers Act of 1940 — which provides the fiduciary standard under which investment advisers currently work — can't be extended to brokers, according to Mr. Carroll.

For instance, an adviser's relationship with a client is continuous, but a broker's is episodic. In addition, the law requires advisers to eliminate or avoid conflicts of interest, while brokers must acknowledge them.


“We're looking for rules that recognize and provide guidance about how conflicts could be managed and disclosed consistent with [acting in] the best interest of retail clients,” Mr. Carroll said.

In its comment letter, the National Association of Insurance and Financial Advisors said a uniform-fiduciary-duty rule would harm middle-income investors.

The group released a survey showing that 84% of financial advisers said that their business costs would increase if the SEC lifted the advice bar.

The poll indicated that 43.9% of the respondents would pass on the higher costs to their clients by imposing or increasing fees, while another 48% said they would limit their practice to clients with a minimum amount of assets.

NAIFA and The American College of Financial Services conducted the online poll of 2,419 NAIFA members, school alumni and other financial professionals May 20-29. About two-thirds of NAIFA's approximately 41,000 members are registered representatives of broker-dealers and mostly sell variable annuities, variable life insurance and mutual funds.

NAIFA emphasized that 83% of the advisers surveyed said that the majority of their clients have investment portfolios of less than $250,000, and more than half serve clients with less than $100,000 in their accounts.

NAIFA argued that raising the broker advice standard to the fiduciary-duty level would increase compliance costs and force them to abandon investors with modest assets.


The Consumer Federation of America warned the SEC not to water down the fiduciary duty.

“We are frankly concerned that unless the commission is prepared to abandon its past propensity to protect the broker-dealer business model at the expense of protecting investors, it will be incapable of developing a fiduciary standard for brokers that truly puts the interests of investors first,” Barbara Roper, the CFA's director of investor protection, wrote in its comment letter.

In a June 27 letter to the SEC, Massachusetts Secretary of the Commonwealth William Galvin asserted that average investors are hurt by brokers who do not have to act in their best interests but rather can sell high-commission, risky alternative investment products as long as they meet the suitability parameters.

He cited a 2010 Massachusetts case in which investors lost $5.7 million on fraudulent private-placement notes. He encouraged the SEC to find similar data about losses investors incurred due to bad advice from brokers.

“I urge the commission not to capitulate to industry advocates and the courts that would relegate investor protection to a "bean counter' analysis concerned with the quantification of industry costs to the exclusion of the harmed warm-blooded investor,” wrote Mr. Galvin, Massachusetts' chief securities regulator.

“While you cannot put a price on investor protection, you can gauge the price paid by investors from the losses they suffer under the current system,” he added. Twitter: @markschoeff


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