Will GAO study trump the SEC's fiduciary review?

The commission launched its study of fiduciary requirements amid fanfare and a flood of public input. But the GAO is quietly examining the regulation of the entire financial planning industry

Sep 10, 2010 @ 3:28 pm

By Mark Schoeff Jr.

While the Securities and Exchange Commission launched its study of fiduciary requirements amid a flood of public input, another Washington agency quietly began examining another topic that could have an equally profound influence on the financial advice business.

Like the SEC, the Government Accountability Office has been given a lengthy to-do list under the sweeping Dodd-Frank law was signed into law in July.

Among the 44 studies it must conduct in the next year is a sweeping review of “the effectiveness of state and federal regulations to protect investors and other consumers from individuals who hold themselves out as financial planners through the use of misleading titles, designations or marketing materials” and evaluate “current state and federal oversight structure and regulations for financial planners … [and] legal or regulatory gaps.”

The provision goes on to list eight other points that the review must cover, including the role of financial planners in providing advice regarding investments, income tax, education and estate planning and risk management,” and “whether current regulations at the state and federal level provide adequate ethical and professional standards for financial planners.”

A former SEC official was surprised by the number of studies that have been assigned to GAO in areas where the SEC also has expertise.

“Maybe Congress felt another agency may be a little more objective and less defensive,” said Laura Anne Corsell, a partner at Montgomery McCracken Walker & Rhoads and a former attorney in the SEC investment management division.

The question is: will the GAO study steal the thunder — or worse, undercut — the SEC's much-anticipated examination of the differences or gaps between the regulatory regimes applied to financial advisers and brokers. The commission's report could set the stage for the promulgation of a universal standard of care for retail investors. Or, the securities regulator could chose to maintain the current set-up, which holds brokers to a less onerous suitability standard.

The GAO and the SEC are supposed to submit their results to Congress in January.

The SEC's report will take into account some 2,500 public remarks received during a thirty-day comment period. Massive campaigns orchestrated by industry associations seeking to sway the regulator one way or the other were responsible for most of the remarks.

By contrast, the GAO's process is a much more private affair. The agency doesn't formally request public comment. Its study team methodically interviews dozens of interest groups and experts, and conducts other analyses. And in this instance, its findings will almost certainly lead to hearings — and could shape legislation that would ratchet up oversight of advisers offering financial planning to clients.

It's conceivable that the SEC also could have conducted the review, but some observers think the GAO will take a step back and take a more dispassionate look at the issue.

“The GAO lends some credibility to the objectivity of it, which is not to say the SEC can't be objective,” said Dan Barry, managing director of government relations and public policy at the Financial Planning Association. “This is someone taking a fresh look without any history that could color their judgment.”

The GAO is often the preference of members of Congress who want to wield influence in an area. Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, and Rep. Michael Capuano, D-Mass., a member of the House Financial Services Committee, pushed for it to conduct the study.

The results and recommendations are hard to predict.

“The GAO could come out either way,” Mr. Barry said. “It's kind of open-ended.”

Mr. Barry's organization, with Mr. Kohl as an ally, had advocated language in the financial reform bill that would have implemented a financial-planner-oversight structure. That language was not included in the final bill, and the FPA had to settle for the GAO study.

The Investment Adviser Association is skeptical of greater regulation for financial planners. The group is confident that the GAO will conduct an even-handed assessment, said executive director David Tittsworth.

“They're in the business of doing just this type of thing,” he said, adding that he and his colleagues have already spoken to the GAO team conducting the study.

“They're very professional. They're very thorough,” Mr. Tittsworth said. “I thought they had done a fair amount of homework.”

In Washington, the GAO staff has a reputation for being meticulous and objective.

“We see our role as supporting Congress,” said Rick Hillman, managing director of the GAO financial markets and commercial investment team. The GAO mission is to provide “fair, balanced, fact-based information and analysis to support their policymaking process.”

Mr. Hillman said that the agency doesn't fashion reports to suit particular Capitol Hill policy goals. If a member requests a study, it's a roll of the dice. That's the best way for GAO to be effective, he said.

“We're going to call the shots as we see them,” Mr. Hillman said. “That may agree with their view or it may not. We jealously guard our credibility.”

[An expanded version of this article will appear in the Sept. 13 isssue of InvestmentNews. The fuller version of the story will also be available on InvestmentNews.com begining on that date]

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