Standards deviation: Universal fiduciary proposal a goner

Push for single code of conduct 'in a coma'

Sep 14, 2012 @ 3:46 pm

By Mark Schoeff Jr.

The push to hold investment advisers and brokers to the same ethical standard appears to be a goner.

Nearly 20 months ago, the Securities and Exchange Commission delivered a report to Congress recommending that the commission issue a regulation that would require all providers of retail investment advice to act in the best interests of clients. Today, the best-case scenario for such a rule is that it will be stalled for years.

In Washington terms, that’s effectively a death sentence.

“The patient is in a coma,” said Don Trone, founder and chief executive of 3Ethos, a firm that provides training on governance, leadership and stewardship.

“Politically, nobody can afford to say the patient has died,” he said. “Any initiative in the industry to raise standards can’t be viewed as having been defeated.”

The Dodd-Frank financial reform law gave the SEC the authority, but not a mandate, to issue a fiduciary-duty rule once the 2011 report was completed. Since then, however, the SEC has had to wrestle with nearly 100 compulsory Dodd-Frank rules.

When the report came out, two Republican commissioners dissented, saying that its conclusion lacked sufficient economic analysis, a charge often echoed by House Republicans. Later that year, a federal court vacated an SEC rule on proxy access for the same reason.

And now, changes at the SEC could bury the issue even deeper.

Observers expect that SEC Chairman Mary Schapiro, a champion of fiduciary duty, will step down after the election, regardless of who wins the presidency.

“[Fiduciary duty] certainly appears to have gone dormant, and I don’t expect there’s going to be activity until next year,” said Neil Simon, vice president of government relations at the Investment Adviser Association. “And whether activity will occur then depends on the composition of the commission.”

Ms. Schapiro asserts that she hasn’t forgotten about fiduciary duty. It’s just stuck behind dozens of mandatory Dodd-Frank mandates.

“I still think this is a really important thing for the SEC to do for investors,” Ms. Schapiro said in an interview with InvestmentNews.

“There’s a fair amount of work going forward inside the building,” she said. “It continues to have prominence today because I’ve kept the issue alive and moving forward.”

The commission has tried to make some headway, with staff members sifting through more than 3,000 comment letters on the topic and commissioners holding dozens of meetings with advocates and skeptics. However, the issue remains too divisive to allow Ms. Schapiro to obtain consensus among the five commissioners to proceed.

“My sense is that there isn’t sufficient agreement at the commission level to allow this next step to occur,” Mr. Simon said.

A disagreement last month among the commissioners killed a proposal on money market mutual fund reform, following months of strong opposition from financial firms and their lobbying organizations.

Ms. Schapiro doesn’t think that fiduciary duty is in a similar position.

“The industry has engaged with us in a reasonable way,” Ms. Schapiro said. “I think we’ve advanced the ball quite a bit.”


In an effort to reignite the process, Knut Rostad, president of the Institute for the Fiduciary Standard, met with Ms. Schapiro two weeks ago and presented her what his group’s Fiduciary Declaration, which was signed by a dozen luminaries in the financial world.

Even he, however, is taking the long view.

“We didn’t get to where we wanted to be this year,” Mr. Rostad said. “Clearly, it’s not optimistic in the short term.”

Mr. Rostad defines “short term” as anywhere from six months to two years.

Investment advisers are at their wit’s end.

“I’m disappointed,” said Kevin Starkey, president of Capstone Investment Financial Group Inc. “It’s critical that we have consistent regulatory oversight for RIAs and advisers in the broker-dealer world and the wirehouses.”

Before proposing a rule, the SEC will conduct the cost-benefit analysis demanded by the dissenting commissioners. A data request was expected early this year, but has yet to be released.

The SEC staff has prepared an outline of elements of a potential fiduciary duty rule — similar to a concept release — designed to elicit detailed responses for a regulatory impact assessment. The document is circulating among commissioners, but not enough of them have signed off yet.

But because interests for and against a rule are deeply entrenched, it seems that Ms. Schapiro’s only avenue forward is to move the effort outside the SEC’s walls.

Proponents contend that a universal fiduciary duty would strengthen investor protection by making brokers adhere to the fiduciary standard that financial advisers must meet instead of the less stringent suitability standard that now governs them.

Skeptics warn that a flawed rule could curtail principal trading and other brokerage services. They argue that regulatory costs and litigation threats would rise, forcing brokers to raise fees and potentially pricing middle-income investors out of the advice market.


The Securities Industry and Financial Markets Association supports a universal fiduciary duty rule, calling on the SEC to establish a new standard that applies equally to advisers and brokers.

But Mr. Rostad blames SIFMA in part for the dead stall.

“The industry, as represented by SIFMA, does not support the fiduciary standard per the [Investment] Advisers Act of 1940,” he said. “That is absolutely a key factor.”

Ira Hammerman, SIFMA general counsel, counters that Mr. Rostad is engaged in “misdirection.”

“The problem is the Knut approach is a play to impose the ’40 Act standard, with its prohibitions, on the brokerage business,” Mr. Hammerman said. “Congress never intended that to be the way forward.”

From the beginning, investment advisers anticipated a difficult battle.

“I was very doubtful that the industry – and all their lobby muscle – would allow it to happen without a fight,” said Matthew Bray, director of client services at Legacy Wealth Planning LLC.

The cost-benefit analysis is volatile because it will have to tackle complicated questions about the market impact of imposing new rules on brokers.

“Costs are easy to measure and benefits are often unquantified,” said John Bogle, founder and former chief executive of The Vanguard Group Inc. “Everybody knows we need [universal fiduciary duty]. It’s important to investors. I don’t know how to put a number on it.”

Advocates haven’t given up hope.

“The fiduciary rule has been put in a state of suspended animation,” said Duane Thompson, senior policy analyst at fi360.

“I don’t think it’s dead at all,” he said. “It’s going to take a while to get the momentum behind the rule moving again.”


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