Advisory panel calls on SEC to move fiduciary duty to front burner

The Investor Advisory Committee gives the commission two options for a uniform standard for advisers and brokers

Nov 22, 2013 @ 12:57 pm

By Mark Schoeff Jr.

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(Bloomberg News)

A Securities and Exchange Commission advisory panel called on the SEC to move forward with a rule that raises investment-advice standards for brokers.

In a voice vote, the SEC Investor Advisory Committee approved a recommendation that the commission promulgate a rule that would require brokers to act in the best interests of their clients when providing retail investment advice. That would subject brokers to the same standard that investment advisers meet.

The Dodd-Frank financial reform law gave the SEC the authority to impose a uniform fiduciary duty for retail investment advice. But it isn't a mandatory rule, and the SEC hasn't indicated when or whether it will propose a rule.

The SEC is conducting a cost-benefit analysis of the market impact of a potential regulation.

“What we're doing here is saying, 'Please move this to the front burner,'” said Darcy Bradbury, managing director and director of external affairs at D.E. Shaw & Co. “Of all the things in Dodd-Frank, this needs to get going.”

SEC Chairman Mary Jo White said that the commission will take into account the panel's recommendation in its deliberations on fiduciary duty.

“I think this is a very important issue myself,” she told reporters on the sidelines of Friday's meeting. “This committee's recommendations are very important to us.”

The panel comprises 21 members, including financial industry officials, academicians, consumer advocates and state regulators. It was established by the Dodd-Frank law to represent the interests of small investors.

In a separate voice vote on Friday, the committee recommended that the SEC seek federal legislation that would allow the commission to levy user fees on advisers to fund their examinations.

The panel said that such a bill, which has been introduced by Rep. Maxine Waters, D-Calif., would bolster SEC resources for adviser oversight, a problem that it said is urgent. The SEC annually examines only about 8% of the nearly 11,000 registered advisers.

The committee's fiduciary-duty recommendation gives the SEC two options for writing a rule. The method that the panel prefers is for the SEC to craft a rule based on the Investment Advisers Act of 1940, which governs how advisers operate.

Using the adviser law ensures that brokers would be held to the same level of care, said Barbara Roper, director of investor protection at the Consumer Federation of America and chairwoman of the subcommittee that wrote the recommendation,

“If you approach it this way, then you have, by definition, met the standard that's set in Dodd-Frank, that it's no less stringent than the existing standard and that it's the same for brokers and advisers,” she said.

The broker-dealer community opposes this approach.

The Securities Industry and Financial Markets Association supports a uniform fiduciary-duty rule but wants the SEC to craft a new one that isn't based on court precedents set under the 1940 law. In an October letter to the SEC, SIFMA said that the commission should use as its starting point the Securities Exchange Act of 1934, which sets rules for brokers.

The organization resists removing the broker exemption from the 1940 adviser law, which the Investor Advisory Committee recommendation would do. In its letter, SIFMA said that such a move would prevent brokers from conducting retirement and investment planning and would be “grossly anti-competitive and unfair.”

The committee also recommended a way for the SEC to propose a uniform fiduciary duty rule under the 1934 law, as long as it includes “an enforceable, principles-based obligation to act in the best interests of their customers.”

Fiduciary advocates say that consumers are confused by the different advice standards that govern advisers and brokers. Advisers must act as fiduciaries, while brokers meet a lower suitability standard when selling investment products.

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