Like everything else in Washington, the outcome of the debate over whether to raise investment advice standards for brokers will come down to politics — or, more precisely, political will.
Securities and Exchange Commission Chairman Mary Jo White has said that she wants the agency to decide by the end of the year whether it will proceed with a rule that would establish a uniform fiduciary duty for retail investment advice. Alternatively, the SEC may choose to pursue other policy changes that fall short of a rule.
If the SEC moves ahead with a rule, the outcome would likely be a regulation that forces brokers to act in the best interests of their clients, a bar that investment advisers already meet. Brokers currently adhere to a suitability standard that allows them to sell higher-priced products as long as they fit a client's investment needs.
The Dodd-Frank financial reform law gave the SEC the authority to promulgate a fiduciary-duty regulation, but it has not yet acted. The issue has been bogged down in part because the agency has nearly 100 mandatory Dodd-Frank rules on its plate. Another important reason is that the fiduciary duty issue splits the commission, with the two Republican members — Daniel Gallagher Jr. and Michael Piwowar — indicating that they oppose rulemaking.
It's always best for a unanimous commission to make regulatory policy. In the last couple weeks, however, Ms. White has shown a willingness to proceed with less than consensus. Money market fund and credit rating agency reforms both passed with 3-2 votes.
Barbara Roper, director of investor protection at the Consumer Federation of America, said that Ms. White must be willing once again to proceed with a majority rather than unanimity when it comes to fiduciary duty.
“This should not be a partisan issue, but if Chair White must take a 3-2 vote to bring it about, so be it,” Ms. Roper said on a Thursday conference call kicking off the
Institute for the Fiduciary Standard's Fiduciary September activities. “This is an issue of sufficient importance to the basic financial well-being of millions of investors that the chair must be willing to take that vote.”
It's not just her fellow commissioners who are an obstacle for Ms. White. She also must overcome SEC staff who are skeptical of a fiduciary-duty rule, according to Ms. Roper.
“The problem, to be frank, starts with the SEC staff itself,” said Ms. Roper, a member of the SEC Investor Advisory Committee. “There seems to be a reluctance within the staff, particularly within the Division of Trading and Markets, to acknowledge any problem with a regulatory policy that allows brokers to remake themselves as advisers while still regulating them as salespeople.”
Over years of talks with SEC staff, Ms. Roper has encountered resistance to fiduciary duty.
“At some point in those meetings, someone from the SEC staff will inevitably ask, 'Well, you know, is the fiduciary duty really a higher standard than suitability?'” Ms. Roper said.
If the SEC does proceed with a rule, Ms. White must carefully select a team that works on it.
“The SEC will need to be willing to put oversight of this rulemaking process in the hands of individuals in the agency who support the project, who are committed to adopting a rule that does not water down the existing fiduciary standard for providing investment advice,” Ms. Roper said.
While Ms. Roper advocates for a fiduciary-duty rule, Ms. White also is hearing from skeptics who worry that such a rule could inflict damage on the brokerage business model and ultimately hurt investors taking that route for advice.
After both sides make their arguments, which they've been doing for more than a decade, the final decision will come down to political will. How fitting for an agency located a few blocks from the Capitol.
