Frank to SEC: Respect B-D model in fiduciary rule

The leading congressional proponent for requiring broker-dealers to adhere to a fiduciary duty is reminding the SEC not to undermine their business practices as it considers a universal standard of care.

In a May 31 letter, Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, reiterated that the Dodd-Frank financial reform law gives the Securities and Exchange Commission the authority to impose a fiduciary duty on broker-dealers that is “no less stringent” than what is required of investment advisers under the 1940 Investment Advisers Act.

Mr. Frank, however, wrote in the letter that SEC Chairman Mary Schapiro should be careful in interpreting the “no less stringent” guidance and to avoid foisting the 1940 law onto broker-dealers.

The letter was included in Friday’s Davis Polk Regulatory Tracker.

“If Congress intended the SEC to simply copy the “40 Act and apply it to broker-dealers, it would have simply repealed the broker-dealer exemption — an approach Congress considered but rejected,” Mr. Frank wrote. “The new standard contemplated by Congress is intended to recognize and appropriately adapt to the differences between broker-dealers and registered investment advisors.”

SEC spokesman John Nester declined to comment on the letter.

The language of Mr. Frank’s letter echoes points that broker-dealers have made throughout the debate over financial reform and during the implementation of the Dodd-Frank law. Although many broker organizations have expressed support for a universal fiduciary duty, they have warned that it should be carefully implemented to avoid upending the broker-dealer business model.

“The broker-dealer community will use the letter to support their arguments,” said David Tittsworth, executive director of the Investment Adviser Association. “But I’m not sure this adds much to the debate.”

The Securities Industry and Financial Markets Association declined to comment on the letter. Mr. Frank was unavailable for comment.

Barbara Roper, director of investor protection at the Consumer Federation of America, has allied with Mr. Frank in advocating a universal fiduciary duty. She doesn’t interpret Mr. Frank’s message as in-dicating that he wants to rein in the SEC.

“In light of his record, I doubt this letter is intended to warn the agency against going too far, particularly since the SEC has made clear it has no intention of taking the approach he warns against,” Ms. Roper wrote in an e-mail.

E-mail Mark Schoeff Jr. at [email protected].