While brokers who provide advice will likely be held to a fiduciary standard this year, a battle is raging on Capitol Hill over what that standard would look like and how it would work.
Competing visions for fiduciary rules have already been played out in financial services regulatory-reform legislation. The Wall Street Reform and Consumer Protection Act (HR 4173), approved Dec. 11 by a 223-202 vote in the House of Representatives, would require the Securities and Exchange Commission to write rules governing brokers who give personalized securities advice to retail customers.
Draft legislation put forward by Senate Banking Committee Chairman Christopher Dodd, D-Conn., takes a different approach. His proposal would simply eliminate the so-called “broker-dealer exemption” from the Investment Advisers Act of 1940. That effectively would mean that brokers providing advice would have to be registered as investment advisers. The Senate is expected to act on its financial services reform legislation early this year.
The distinctions are subtle, but they mean a lot to the adviser and broker segments of the industry. Investment advisers fear that the SEC might write rules that would weaken traditional fiduciary standards in order to accommodate brokers. For their part, brokers insist that putting them under the traditional fiduciary standard could make it impossible for them to conduct their traditional lines of business, such as selling securities from company inventories or selling on commission.
Bringing all advice givers under a fiduciary standard, whether under the House legislation or under the Senate proposal, would have pros and cons. It would make the standard more understandable for investors and give them greater protection against conflicts of interest. But it also could result in less convenience for investors if they had to go elsewhere to buy securities products. It also could result in higher fees.
But it appears likely that the SEC will end up with the responsibility of writing the rules governing advisers. “I'd bet that Congress comes up with some kind of legislation that directs the SEC to conduct rule making on fiduciary duty,” predicted David Tittsworth, executive vice president and executive director of the Investment Adviser Association, which represents SEC-registered advisory firms.
That undoubtedly will create new battles. In a Dec. 3 speech to the Consumer Federation of America, SEC Chairman Mary Schapiro called for coupling fiduciary duties with “an effective oversight regime,” as well as the same licensing, qualification requirements and regulations for all advisers. That could mean having no distinction between investment advisers and brokers who give advice.
Another issue Ms. Schapiro has pledged to take up this year is the $13 billion in 12(b)-1 fees that brokers collect for selling mutual funds. “We must critically rethink how 12(b)-1 fees are used and whether they continue to be appropriate,” Ms. Schapiro said in her speech to the CFA.
The fees were instituted in 1980 as a way for mutual funds to cover distribution costs. But they have evolved over time into fees that advisers collect to cover some of the cost of providing continuing service to clients. Abolishing the fees could result in a fairer system for investors, who currently may end up paying more through the fees than they would pay in upfront sales loads. But abolishing them could result in brokers' selling products that are more expensive for investors, such as wrap-fee accounts.
“At the end of the day, there's no clear, simple answer as to how to deal with revising, restructuring 12(b)-1, versus attempting to repeal it,” said Geoff Bobroff, president of Bobroff Consulting Inc., which serves the asset management industry. The likely result is that the fees will be capped to ensure that investors do not pay more than normal sales loads.
E-mail Sara Hansard at [email protected].
