The Securities and Exchange Commission today launched an effort to determine how raising investment advice standards for brokers would affect the financial markets.
The agency released a
72-page request for information that would be used to conduct a cost-benefit analysis of a potential rule that would require brokers to act in the best interests of their clients — an obligation that investment advisers already meet.
The Dodd Frank financial reform law gave the SEC the authority to promulgate a regulation that would impose a uniform fiduciary standard of care for retail investment advice. A January 2011 SEC report recommended that the agency proceed with a rule.
For the past two years, the SEC has not taken action — in part because it is inundated with nearly 100 required Dodd-Frank rule makings.
In addition, skeptics of a fiduciary-duty standard have demanded that the SEC justify a rule with a detailed cost-benefit analysis. Friday's request for information is the first step in putting together such a study.
The agency is seeking input from the public, which will have 120 days to respond after the request is published in the Federal Register. The publication should occur sometime in the next week.
“We expect that the data and other information provided to us in connection with this request will assist us in determining whether to engage in rule making and, if so, what the nature of that rule making ought to be,” the agency stated in the request document.
The request also asks for input on ways to harmonize the regulation of investment advisers and brokers, who currently operate under two different federal laws.
“I'm impressed by the extraordinary breadth of information the SEC is seeking,” said Neil Simon, vice president for government relations at the Investment Adviser Association.
In their response to the information request, the Certified Financial Planner Board of Standards Inc. will try to convince the SEC to move forward with a rule.
“We plan to use this opportunity to continue advocating for a strong, principles-based fiduciary standard that – consistent with Dodd-Frank – is no less stringent than the existing fiduciary standard under the [Investment] Advisers Act,” Marilyn Mohrman Gillis, CFP Board managing director of public policy and communications, said in a statement.
The Securities Industry and Financial Markets Associations supports a uniform fiduciary standard but has urged the SEC to define it carefully and provide clear guidance on how brokerages can comply. It welcomed the SEC's renewed focus on a potential rule.
“We've been expecting the SEC to move in such a fashion, and we believe that gathering further data is the next appropriate step forward,” Ira Hammerman, SIFMA general counsel, said in a statement.
The agency is seeking data in a wide range of areas, including investment returns that clients receive in each of the business models, stock selections made by the two different kinds of advisers, and investors' ability to file claims against a broker or investment adviser.
The document provided an outline of how a uniform standard of conduct might look. For instance, it said that respondents could assume that “the uniform fiduciary standard of conduct would be designed to accommodate different business models and fee structures of firms and would permit broker-dealer to continue to receive commissions; firms would not be required to charge an asset-based fee.”
“Broker-dealers also would continue to be permitted to engage in, and receive compensation from, principal trade,” the document continued.
In addition, brokers would not have a continuing duty of care for a client after providing advice, and they could offer proprietary investment products or products from a limited menu of investment offerings.
“Studies have shown that few investors realize that the standard of care they receive depends on the type of investment professional they use. And often investors do not know which type of financial professional they are relying on,” SEC Chairman Elisse B. Walter said in a statement. “This request for information will help us in our ongoing consideration of alternative standards of conduct for certain broker-dealers and investment advisers, as well as potential harmonization of other aspects of regulation in this area.”
Trying to put a number on acting in a client's best interests is daunting for those who will respond to the request.
“It's going to be extraordinarily challenging to quantify the costs and benefits in some sort of objective manner,” Mr. Simon said.
First, everyone has to wade through the hefty request document.
“We're all going to be going over this thing with a fine-tooth comb,” Mr. Simon said.
