State securities regulator questions Schapiro's ‘single standard'

NASAA president Denise Voigt Crawford worried about SEC's definition of ‘fiduciary'

Dec 4, 2009 @ 4:29 pm

By Sara Hansard

SEC Chairman Mary Schapiro's comments on Thursday that all financial advisers who provide personalized advice should come under “meaningful” fiduciary standards has drawn heat from a group representing state securities regulators.

Speaking at a press conference in Washington, Denise Voigt Crawford, president of the North American Securities Administrators Association Inc., questioned how stringent such a standard would be.

“Everybody is saying that they believe in one standard, and everybody is saying that they believe that it should be a fiduciary standard,” said Ms. Crawford, whose group advocates putting all brokers and advisers under the traditional standard established by the Investment Advisers Act of 1940.

“If you listen to Mary Schapiro speak, she'll say there needs to be one standard; it needs to be fiduciary. But she never says that it should be the '40 Act standard. That is huge, and it's very worrisome to us — because anything else is whatever people decide it's going to be.”

In an e-mail, Securities and Exchange Commission spokesman John Nester noted that Ms. Schapiro has testified in support an Obama administration proposal containing language calling for broker-dealers and investment advisers to act “solely in the interests of their customers or clients when providing investment advice.”

Draft legislation in the Senate would require brokers to come under the Investment Advisers Act and traditional fiduciary standards. “The Senate approach preserves the … authentic fiduciary standard,” Ms. Crawford said.

Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, noted his group's support for the establishment of a federal fidicuary standard that will improve upon the current patchwork system that governs those who provide personalized investment advice.

SIFMA, which represents the brokerage industry, favors having the Securities and Exchange Commission write new rules that would create a uniform fiduciary standard, but would still allow brokers to conduct business as they have done, including allowing principal trades.

“We may disagree on how to do it, such as simply repealing the broker-dealer exemption from the ‘40 Act, but disagreeing on the way to accomplish the goal does not mean we oppose the goal,” Mr. DeSouza wrote in an e-mail.

Ms. Crawford, who is also Texas securities commissioner, criticized parts of the financial reform package pending in the House, particularly a Republican-sponsored provision that would place many investment advisory firms under the regulation of the Financial Industry Regulatory Authority Inc.

The possibility of Finra oversight of advisory firms “causes us great concern,” Ms. Crawford said. “We do not really want Finra to take on this role,” she said. “Finra is a private organization that is accountable to its own members.”

House Financial Services Committee Chairman Barney Frank, D-Mass., has vowed to fight the Finra oversight provision when the bill is considered by the full House.

NASAA supports proposals pending in both houses of Congress that would move jurisdiction of about 4,000 investment advisory firms from the SEC to the states. To prepare for that responsibility, Ms. Crawford said she signed a rare NASAA “Memorandum of Understanding” Dec. 2 that will allow states to work with each other to regulate the additional advisory firms.

All states are expected to sign onto the MOU if the legislation is enacted. The House and Senate bills would raise the asset threshold to $100 million for advisory firms to be regulated by the SEC. Currently advisory firms with more than $25 million are regulated by the SEC.

The states will be able to inspect advisory firms more frequently than the SEC is currently able to do, Ms. Crawford said. The SEC now only inspects about 9% of the approximately 11,000 advisory firms is has jurisdiction over.

State securities administrators also favor Senate draft legislation requiring the Commission to issue rules banning or restricting mandatory arbitration clauses in broker contracts with customers. A bill in the House only provides an option for the SEC to consider rules to prohibit the clauses. Investors need alternative forums for dispute resolution, including going to small claims court, Ms. Crawford said.

The NASAA head skewered the SEC and Finra for not detecting the massive Ponzi scheme fraud perpetrated by Bernard L. Madoff Investment Securities LLC. She labeled those as “failures on the part of federal regulatory agencies,” including Finra in that characterization.

A special Finra review showed that the authority did not have access to the information the SEC had about the fraud in the Madoff investment adviser, Howard M. Schloss, executive vice president for corporate communications and government relations, wrote in an e-mail.

Finra has taken many steps in the wake of Madoff to improve its fraud detection capabilities, including the creation of the Office of Fraud Detection and Market Intelligence, he added.

Asked whether the SEC has improved its performance over the past year, Ms. Crawford said that, “The jury is still out on whether the culture at the SEC is going to change,” she said.

“The folks that are employed at the commission, most of the time are looking for a job on Wall Street,” Ms. Crawford said. “It makes it very difficult for them to take a hard line against their future employer who's sitting across the table.”

Mr. Nestor disagreed. “The change at the SEC has been dramatic. We have brought on new senior management, seen significant increases in the numbers of investigations and penalties, pursued important investor-focused rulemaking and reformed out internal operations.”

He added: “We are aware of no basis for the comments.”

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