Schapiro: SEC is soliciting input on fiduciary issue

Just days after the financial-regulatory-reform law was signed, the Securities and Exchange Commission issued a request for public comment on a provision addressing the standard of care for investment advice.

Just days after the financial-regulatory-reform law was signed, the Securities and Exchange Commission issued a request for public comment on a provision addressing the standard of care for investment advice.

The SEC formally began soliciting input last month, SEC Chairman Mary Schapiro said in a recent speech at the U.S. Chamber of Commerce in Washington.

The SEC is “expanding our [comment] process beyond what is legally required,” she said. The SEC 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. The commission 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 SEC 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 ensure that products meet client needs and timelines.

Fiduciary advocates argue that raising broker-dealers to that standard will better protect investors from losing money to unscrupulous advice-givers. 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 won’t have a continuing responsibility to their clients after the sale of a product.

Ms. Schapiro noted that the new law requires the SEC, 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 request for public comments on fiduciary duty was published in the Federal Register on July 30 and the comment period will remain open until Aug. 29 The comment form is available at sec.gov/rules/other.shtml.

“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, she has instructed SEC staff members 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. Ms. Schapiro also said that the SEC will hold some public hearings.

Although the fiduciary study doesn’t 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 of Commerce 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.

The study process provides an opportunity to sort out investor confusion over differing standards of care, according to Steve Bartlett, president and chief executive of the Financial Services Roundtable.

“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 SEC will seriously and carefully consider their input.

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

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