Schapiro: SEC now soliciting input on fiduciary issue

The agency is expanding its process to invite input before rules are proposed and official comment periods have begun

Jul 27, 2010 @ 3:40 pm

By Mark Schoeff Jr.

Within a week of President Barack Obama signing into law financial regulatory reform legislation, the Securities and Exchange Commission has issued a request for public comment on a provision addressing the standard of care for investment advice.

On Tuesday, the agency formally began soliciting input, SEC Chairman Mary Schapiro said in a speech at the U.S. Chamber of Commerce in Washington.

She said the SEC is “expanding our [comment] process beyond what is legally required.” The agency will establish e-mail boxes on its website ( organized by topic and deployed based on which rules must be implemented first.

“The idea is to offer maximum opportunity for public comment and to provide greater transparency,” Ms. Schapiro said. “We are inviting public comment even before the various rules are proposed and before the official comment periods have begun.”

Much of the onus for turning the 2,300-page reform legislation into law falls on agencies such as the SEC. For instance, Congress directed the SEC to promulgate 205 rules, 86 of them involving investor protection, according to a study by the Chamber's Center for Capital Markets Competitiveness. It also has to produce 24 studies and 31 reports in the area.

The new law gives the SEC the authority to impose a uniform standard of conduct on anyone who provides investment advice to retail customers. First, though, the agency must conduct a six-month study examining the differing standards under which investment advisers and broker-dealers operate.

Under current law, investment advisers must meet a fiduciary standard, which requires them to act in the best interests of clients and disclose all material conflicts of interest. Broker-dealers must meet a suitability standard requiring them to offer products that meet client needs and timelines.

Fiduciary advocates argue that raising broker-dealers to that standard will better protect investors from losing education and retirement funds to nefarious advisers. Suitability backers warn that misapplying the fiduciary standard could undermine the broker-dealer business model and rob investors of inexpensive financial guidance.

The bill stipulates that charging a commission and offering proprietary products are not necessarily violations of the fiduciary standard. It also says that broker-dealers would not have a continuing responsibility to their clients after the sale of a product.

Ms. Schapiro noted that the new law requires the agency, if it proceeds with rulemaking, to promulgate a fiduciary standard that is “no less stringent” than the one that applies to investment advisers.

She also said, for the first time, that instead of flowing from “the perspective and legal regimes of the adviser or broker,” the new rule will come from the investor's perspective.

The public comment period on fiduciary duty will remain open for 30 days after the request was published in the Federal Register on July 30. The comment form is available at

“Comments that recognize the primary and central importance of investor protection but offer suggestions on implementing fair and flexible regulation will help us craft rules that increase investor confidence while preserving brokers' ability to offer a full spectrum of services,” Ms. Schapiro said.

In gathering input, Ms. Schapiro has instructed SEC staff to meet with any parties that seek an audience, request an agenda from the parties prior to the meeting and encourage meeting participants to submit written public comments afterward. She also said that the agency would hold some public hearings.

Although the fiduciary study does not have to be submitted to Congress until Jan. 21, some observers are already predicting that rulemaking in this area will have a big effect.

“It's going to radically change the way in which brokers sell a product,” A. Thomas Smith, a managing director at Deutsche Asset Management Inc., said at the Chamber event. He warned that the reform may foster litigation.

Requiring the study before the rulemaking means Mr. Smith's concerns and others will be given a full airing. Steve Bartlett, president and chief executive of the Financial Services Roundtable, said the study process provides an opportunity to sort out investor confusion over differing standards of care.

“It does give the SEC and us a chance to step back and rethink it,” Mr. Bartlett said at the Chamber event.

Ms. Schapiro tried to reassure the audience of lawyers and financial professionals that the agency would seriously and carefully consider their input.

“We are determined to do this right, and we are determined to get this right,” she said.


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