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Lines are drawn within the SEC, slowing potential fiduciary duty rule

May 19, 2014 @ 11:19 am

By Mark Schoeff Jr.

SEC, fiduciary duty, Daniel Gallagher, Michael Piwowar, Finra
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Stephen Luparello, director of the SEC Division of Trading and Markets. (Bloomberg)

Widely differing opinions among the members of the Securities and Exchange Commission are slowing the agency's work on raising investment-advice standards for brokers, according to an SEC official.

Stephen Luparello, director of the SEC Division of Trading and Markets, said that internal deliberations are under way at the SEC. But coming to a resolution is another matter.

“It is a live topic of conversation,” Mr. Luparello told about 1,000 attendees at the Financial Industry Regulatory Authority Inc.'s annual conference in Washington, D.C., on Monday. “There may not be a real coalescence of thought around any of this. There's a lot of churn both inside and outside the building before we start to coalesce.”

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a rule that would impose a uniform fiduciary duty for retail investment advice. Such a rule would require that financial advisers act in the best interests of their clients — a bar that investment advisers already meet. Brokers adhere to a less stringent suitability rule when selling investment products.

For the last four years, the SEC has been considering a rule. SEC Chairman Mary Jo White has said that coming to a decision on how to proceed — perhaps with options that fall short of a fiduciary standard — is a priority for this year.

In a recent speech, SEC member Daniel Gallagher expressed doubt about the need for a fiduciary-duty rule. SEC member Michael Piwowar has voiced similar misgivings.

The hang-up is translating how fiduciary duty would work for brokers, according to Mr. Luparello.

“It's not so much a policy challenge as it really is an implementation challenge,” he said. “One of the problems with the 'F word' is there isn't a whole lot of specificity around what means” for brokers.

Finra chairman and chief executive Richard G. Ketchum said that making the fiduciary standard the starting point for working with clients would be the best foundation for investor protection. But he acknowledged that going from principle to daily practice will be difficult for regulators to sort out.

“The challenge with the 'F word' is the details from the standpoint of interpretive laws … and risks from a litigation standpoint,” Mr. Ketchum said.

An official at a broker-dealer who participated on the Finra panel said that implementing fiduciary duty in the daily business of brokers won't be as simple as telling them to act in the best interest of their clients.

“It really is a tougher challenge than adding fiduciary duty and saying you're done there,” said Dan Kosowsky, chief compliance officer at Morgan Stanley Wealth Management.

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