High-wire act

The SEC's Mary Schapiro is treading carefully, trying to move a fiduciary standard forward

Feb 27, 2011 @ 12:01 am

By Mark Schoeff Jr.

When the Securities and Exchange Commission released a highly anticipated report last month by its staff recommending that brokers and investments advisers be held to the same fiduciary standard, some supporters felt the issue had been settled once and for all, and predicted that the agency would have a rule in place by the summer.

They could not have been more wrong.

Instead of clarifying the issue — ostensibly the reason the Dodd-Frank reform bill called for the SEC study in the first place — the subject is still being debated. Now it's anyone's guess when or even if a single fiduciary standard will be adopted.

Although SEC staff recommended a universal fiduciary duty, it left crucial details about disclosure parameters and harmonization of adviser and broker-dealer rules up to the agency's five commissioners.

Two of them, Republican appointees Kathleen Casey and Troy Paredes, issued a dissent to the report, saying that its conclusion that a universal fiduciary duty would better protect investors confused about the different standards of conduct for brokers and advisers was not sufficiently supported.

Right now, advisers are bound by law to act in their clients' best interests, while brokers are required to make sure investments they recommend are suitable.

At the very least, the split among the commissioners means that it will take longer for a fiduciary rule to be adopted, and that SEC Chairman Mary Schapiro must tread carefully as she balances the need for a fiduciary standard against all of the other goals of the SEC.

“Life just became a lot more complicated for the chairman,” said Michael Koffler, a partner at Sutherland Asbill & Brennan LLP. “Does she want to proceed on a 3-2 vote when [fiduciary duty] has been such a divisive issue for the industry? Or does she want to take into account the concerns of commissioners Paredes and Casey and build more of a consensus before putting the issue to a vote?”

The path Ms. Schapiro chooses could affect how well the commission works together not only on the fiduciary-duty rule but also on the nearly 100 other regulations it must propose under Dodd-Frank, Mr. Koffler said.

Intra-agency politics are not the only obstacle for Ms. Schapiro. She also must deal with a Congress whose political complexion has changed substantially since Dodd-Frank was approved on nearly party line votes in the Democrat-controlled House and Senate last summer. Republicans now control the House and have substantially increased their numbers in the Senate.

“We have a lot of work ... ahead of us before we actually take a pen to paper and figure out what we might do in terms of writing any specific rule,” Ms. Schapiro told reporters after a speech this month in Washington.

She was quick to point out that Ms. Casey and Mr. Paredes stated that they are not necessarily opposed to a fiduciary duty but want to see more data and analysis.

“We have our work cut out for us,” Ms. Schapiro said. The report “was really very much the first step in what will be a process,” she said.

It's not clear whether the qualms expressed by Ms. Casey and Mr. Paredes will be shared by congressional Republicans. But their objections give an opening to representatives of the National Association of Insurance and Financial Advisors to visit Capitol Hill and reiterate their doubts about fiduciary duty.

Currently, NAIFA's registered representatives of broker-dealers operate under the less stringent suitability standard. They contend that they could be forced to move to a fee-based business that would be more expensive for clients than their current commission model.

“The risk is displacement,” said Terry Headley, president of NAIFA and Headley Financial Group. “Perhaps that middle-income market will be disenfranchised and underserved. That's one of the unintended consequences not being addressed. What we want to make sure is that middle-income Americans have access to qualified financial advice.”

Dodd-Frank stipulates that charging a commission and selling proprietary products are not necessarily fiduciary breaches. It also states that broker-dealers would not have a continuing duty of care beyond the sale of a product.


The law authorizes the SEC to proceed with a fiduciary-duty rule. But the new Republican majority on Capitol Hill is likely to want to weigh in first. Hearings on the fiduciary report are expected but not yet scheduled.

“I don't think the SEC is going to be indifferent to congressional sentiment as they move forward,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “The wild card is the amount of push-back the SEC gets from Congress as a result of [the Casey and Paredes] dissent, and the NAIFA lobbying.”

The agency in the past has proceeded with regulations stemming from legislation, such as rules that pertained to equity-indexed annuities and small-company accounting audits, only to see Congress later upend them.

“The SEC has little appetite for pursuing rulemaking that is simply going to embroil them in a new legislative battle,” Ms. Roper said.

Whenever fiduciary-standard rulemaking starts, one of the biggest battles between interest groups likely will involve disclosure for broker-dealers.

The SEC report states that the commissioners should consider whether to “prohibit certain conflicts, to require firms to mitigate conflicts ... or impose specific disclosure and consent requirements.” Many fiduciary advocates feel that conflicts should be avoided altogether under the standard.

With the Securities Industry and Financial Markets Association already in support of a fiduciary duty in principle and now focused solely on how it is “operationalized,” the ground is prepared for progress on the issue, Ms. Roper said.

“We're in a much better position than if they were just in opposition,” Ms. Roper said.

Investment advisers are hopeful that everyone in the advice sector eventually will have to play by their rules.

“The SEC has taken the first right step by not diluting the definition,” said Barry Glassman, president of Glassman Wealth Services LLC. “I've been incredibly pleased with the fiduciary conversation taking place.”

E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.


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