Recent recommendation only the 'first step' in longer process
After delivering a highly anticipated report to Congress recommending that anyone providing personalized retail investment advice should operate under a fiduciary duty, the Securities and Exchange Commission is apparently in no hurry to promulgate a regulation imposing such a standard.
“We have a lot of work to do ahead of us before we actually take a pen to paper and figure out what we might do in terms of writing any specific rule,” SEC Chairman Mary Schapiro told reporters on Friday after a speech to a Practising Law Institute conference in Washington.
The fiduciary duty report, mandated by the Dodd-Frank financial reform law and written by SEC staff, was sent to Congress on Jan. 21. Dodd-Frank gives the agency the option of proceeding with rulemaking.
But two SEC commissioners, Kathleen Casey and Troy Paredes, issued a dissent to the fiduciary report. They said that its conclusion — that the standard would better protect investors confused by the differing levels of care investment advisers and broker dealers must meet — was not sufficiently supported.
On Friday, Ms. Schapiro was quick to point out that Ms. Casey and Mr. Paredes stated that they were not necessarily opposed to a fiduciary duty but wanted to see more data and analysis.
Ms. Schapiro did not indicate a timeline for promulgating a fiduciary duty rule. She said that the agency had met with many investor advocates and industry representatives and would continue to do so.
“We have our work cut out for us,” Ms. Schapiro said. The report “was really very much the first step in what will be a process.”
The fiduciary duty report is one of nearly 20 that the SEC must produce under Dodd-Frank. The financial reform act also calls for the agency to write nearly 100 new rules, according to an analysis by Davis Polk & Wardwell LLP.
In her speech on Friday, Ms. Schapiro said that the SEC had already proposed 24 rules, adopted six in final form and approved two rules from self-regulatory organizations.
She warned, however, that the SEC is not getting the funding it needs from Congress to cope with the added workload from Dodd-Frank mandates. She noted that over the past decade, market trading volume has doubled, the number of investment advisers the SEC monitors has grown by 50% and the funds they manage has increased to $38 trillion.
The agency, along with the rest of the government, is functioning at fiscal year 2010 budget levels until at least March 4 because Congress has not yet passed a new budget. The impasse had denied the SEC the 18% increase in funding that was called for this year under Dodd-Frank.
“We've been operating under a continuing resolution that has hampered our ability to do what investors and capital markets deserve,” Ms. Schapiro said in her speech. “It is a strain that is already having an impact on our core mission — separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisers and credit rating agencies.”
So far, Ms. Schapiro has not received much sympathy from the new Republican majority in the House, which came into office last month with budget cutting at the top of its agenda
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“A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation's problems can be solved with more spending, not more efficiency,” Rep. Scott Garrett, R-N.J. and chairman of the House Financial Services Subcommittee on Capital Markets, said in a recent statement.
Commissioner Casey provided a different point of view on the budget difficulties. In her speech, she said that the problem is the voluminous Dodd-Frank mandates rather than a lack of SEC resources.
“The real threat here is that we will not be able to fully consider the rules we are proposing and the consequences of those rules,” said Ms. Casey, who is a Republican appointee.
Advocates of establishing a self-regulatory organization for investment advisers say that the move would help ease SEC budget problems by relieving it of the adviser-oversight burden. An SRO, — fiercely opposed by investment adviser groups — one of three options a recent SEC report gave to Congress for strengthening adviser regulation.
The other two recommendations were to impose user fees on advisers for SEC monitoring or to give the Financial Industry Regulatory Authority Inc., the SRO for broker dealers, oversight responsibility for investment advisers who are dually registered as broker dealers.
Ms. Schapiro, a former Finra chief executive, sidestepped a question about the SRO report.
“I have no comment on that,” Ms. Schapiro told reporters. “I'm not taking a position on the SRO issue.”
Her commission colleague Elisse Walter, however, is a strong advocate for an SRO. Ms. Walter, also a former Finra official, issued a statement accompanying the SEC report criticizing it for not strongly enough backing the SRO option.
“It places the burden on the industry to fund the oversight; oversight that is really not taking place effectively,” said Ms. Walter after an appearance at the law conference.
