Without the unequivocal support of all the members of the Securities and Exchange Commission, just how much can we learn about the future direction of the regulation of investment advice from the two SEC studies that were released last month?
The reports were characterized as “staff reports” since the commissioners simply voted to release the studies and didn't express an agreed-on view of the analysis, findings or conclusions. However, by reading between the lines, there is a sense that the commissioners' support might not be as important as one might think.
The Study on Enhancing Investment Adviser Examinations, released Jan. 19, is more commonly referred to as “the SRO study” since it principally addresses what role one or more self-regulatory organizations should play in the regulatory oversight of advisers. The staff recommended three approaches to improve regulatory oversight and adviser examinations, all of which would require congressional action to implement.
The three options are: appoint the SEC to provide oversight and fund the process by imposing user fees on registered investment advisers; instruct one or more SROs to examine all RIAs, subject to SEC oversight; and authorize the
Financial Industry Regulatory Authority Inc. to examine dually registered advisers.
Although the report didn't come out directly in favor of SEC oversight, it is clear that this is viewed as the best option — as long as the SEC's situation of chronic underfunding is addressed by Congress' authorizing self-funding. The report leaves little doubt that the issue is first and foremost, if not exclusively, a funding problem.
The SEC has the experience, expertise and, most importantly, the objectivity that SROs lack; it just doesn't have access to the resources that self-funded SROs have. The logical solution is to fix the funding problem at the SEC.
Unfortunately, the outcome of this battle probably will have less to do with what makes sense and almost everything to do with where the money will come from. Congress likes having the power of the purse strings over the SEC.
Keeping the SEC under the appropriations process accomplishes two things.
First, it allows Congress to deny funding for the SEC if it wants to curtail the enforcement of regulations without having to support weaker investor protection laws publicly.
Second, it keeps the fountain of industry lobbying dollars flowing. If Congress can continue to control the level of regulatory oversight by constricting the flow of money appropriated to the SEC, lobbyists will have good reason to keep pumping money to those in Congress who will do their bidding in the appropriations process.
Although the SRO study makes a compelling case that investors' interests will be best-served if adviser oversight is provided by a self-funded SEC, and when you weigh that option against an SRO approach that better serves the interests of legislators and financial product providers, the smart money is probably betting on an SRO. However, kudos to the SEC staff for issuing a solid analysis that deprives Congress the ability to gloss over investor interests when they deliberate this report.
The anxiously anticipated Study on Investment Advisers and Broker-Dealers came out Jan. 22. Widely referred to as “the fiduciary study,” this staff report is explicit in its core recommendation that the SEC establish through rulemaking a uniform fiduciary standard of conduct for brokers, dealers and investment advisers that directs them to act in the best interests of the retail customer when providing personalized investment advice.
The report repeatedly emphasizes that the Dodd-Frank Act, which mandated the study, provides that a fiduciary standard established by SEC rulemaking shall be no less stringent than that currently applied under the Investment Advisers Act of 1940. Moreover, the report also highlights the fiduciary duties of loyalty and care as being essential elements of the uniform standard.
Taken together, these provisions are exceptionally important, as they should make it difficult for the fiduciary standard to be heavily diluted during the rulemaking process.
Unlike the SRO issue, implementation of the uniform fiduciary standard can proceed through SEC rulemaking without further congressional action. Therefore, the SEC itself will be the target of lobbying pressure from the insurance industry and segments of the brokerage community.
They will seek to weaken the standard. Even so, the depth, breadth and recommendations of the study would seem to be enough to convince even die-hard opponents that it is time to retool from a sales/suitability/compliance structure to a fiduciary model for all advisory activities.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.
