Fiduciary ball squarely in commission's court

Jul 14, 2013 @ 8:31 am

By Mark Schoeff Jr.

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In the nearly three years since the Dodd-Frank financial reform law was enacted, the Securities and Exchange Commission has made little progress toward a regulation that would establish a uniform fiduciary standard for retail investment advice.

But with a comment period for a cost analysis completed, the ball is in the SEC's court as to what, if anything, it will recommend doing as far as a new fiduciary standard.

Dodd-Frank gave the SEC the authority to promulgate such a rule but didn't mandate one.

As the SEC wades through the approximately 150 letters that it has received, here are some of the options that the commission is likely to consider:

Propose a rules-based fiduciary duty. Fiduciary advocates are worried that this might be the outcome, based on the way the request for information was written. The 72-page document listed eight assumptions about fiduciary duty to guide the comment letters.

The SEC focused on disclosure and stated, among other things, that a uniform standard would not require a continuing duty of care or loyalty and would be outlined in a contract or other arrangement with a retail customer.

“Based on the language I saw in the March 1 request for information, the SEC is moving in the direction of a rules-based standard and the harmonization of rules with Finra,” said Don Trone, president of the Leadership Center for Investment Stewards.

In their comment letters, several fiduciary advocates warned the SEC not to go down this road.

“The SEC is poised to neuter the fiduciary standard,” wrote Knut Rostad, president of The Institute for the Fiduciary Standard. “The [request for information] assumptions categorically reject basic fiduciary principles and, instead, set out the basis for a lower commercial-sales standard.”

The Securities Industry and Financial Markets Association would benefit from a rules-based fiduciary duty.

SIFMA has maintained that it favors a best-interests standard. But it has concerns about how it would operate.

“In implementing a uniform fiduciary standard, SIFMA urges the SEC to provide guidance that would specifically apply to the [broker-dealer] business model, rather than attempting to apply [1940 Investment] Advisers Act guidance and precedence to B-Ds,” senior managing director and general counsel Ira Hammerman wrote.

Propose a principles-based fiduciary standard. This is the outcome on which fiduciary advocates have their hearts set. They emphasize that the Dodd-Frank law requires that a uniform standard be “no less stringent” than the Investment Advisers Act, which requires advisers to act in their clients' best interests.


But Republican and Democratic lawmakers, as well as Wall Street industry groups, have asserted that Dodd-Frank did not envision the SEC foisting the Advisers Act on brokers.

“The likelihood of that is nil,” Mr. Trone said.

Harmonize broker-dealer and investment adviser regulations. Another section of the request for information discusses so-called harmonization of broker-dealer and investment adviser rules in the areas of advertising, use of finders and solicitors, supervision, licensing and registration, continuing education, and books and records.

The Investment Adviser Association blanched at the emphasis on the topic in the request for information. In its comment letter, it asserted that rationalizing broker and adviser rules is misguided because advisers dispense advice primarily, while brokers engage in sales.

“Imposing the broker-dealer rule set on investment advisers would fail to recognize those fundamental differences and would impose substantial costs with no corresponding investor protection benefit,” wrote David Tittsworth, the IAA's executive director.

Schwab Advisor Services put a price on harmonization, arguing in a comment letter that compliance would cost the registered investment adviser industry more than $1.83 billion for the first year and $1.23 billion annually thereafter. The figures are based on a poll of Schwab advisers.

Wild cards remain in the Labor Department's fiduciary rule, SEC makeup. As the SEC mulls its fiduciary rule, the Labor Department is poised to promulgate its own rule that would expand the definition of “fiduciary” as it applies to anyone providing investment advice to a retirement plan.

This effort has generated fierce resistance from the financial industry, as well as bipartisan members of Congress, who assert that it would subject brokers selling individual retirement accounts to a fiduciary duty.

“The DOL rule making is a real wild card in this situation,” Mr. Tittsworth said. “What the DOL does or doesn't do will have a significant impact on SEC rule making.”

The SEC itself will undergo a change this summer, with the likely Senate confirmation of nominees Kara Stein, a Democrat, and Michael Piwowar, a Republican. Another new face is SEC Chairman Mary Jo White, who started three months ago.

“We actually have a new commission deciding this issue,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc. “We're hopeful they'll look at it with fresh eyes.”

But that may not happen soon.

The cost-benefit analysis information request “was clearly an effort to kick the can down the street another 20 months,” Mr. Trone said. “It's going to delay rule making for a long period of time.”


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