A recent round-table discussion sponsored by
InvestmentNews demonstrated that there is still a wide divide between advisory and brokerage groups over establishing a uniform fiduciary standard.
Indeed, the lack of consensus among the advisory groups prompted Rep. Scott Garrett of New Jersey, ranking Republican member of the House Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, to question whether there would be any provisions on broker-adviser regulations in financial-reform legislation coming out of Congress.
“I'm not as optimistic that we will achieve ... some of [the] reforms that we need in the area,” he said. The regulatory round table was held in Washington on Jan. 21.
While the financial-reform bill passed Dec. 11 by the House of Representatives includes a provision that would authorize the SEC to write rules for brokers and advisers, Republican members of the House Financial Services Committee have a lot of “uncertainty, quite candidly, as to the capability of the government — the SEC — to be able to totally handle it,” Mr. Garrett said.
Advisers are bound by a fiduciary standard that requires them to act in the best interests of their clients, but brokers follow a different standard that calls for them to place clients only in suitable investments. Research shows that investors often don't know or understand the distinction.
The round-table participants made it clear that there is no consensus on a uniform standard that should be applied to advisers and brokers giving investment advice.
“Harmonization” of standards “is sort of in the eye of the beholder,” said Dan Barry, director of government relations for the Financial Planning Association. When regulators start getting down to details, “that's where we all probably go to separate corners and see things a little bit differently,” he said.
“Harmonization seems to be a code word for imposing broker-dealer rules on investment advisers, not the other way around,” said David Tittsworth, executive director and executive vice president of the Investment Adviser Association, which represents larger advisory firms that are already regulated by the Securities and Exchange Commission.
A legislative proposal that would require all financial service professionals providing advice to be registered as investment advisers is a “cleaner way ... of dealing with these issues,” Mr. Tittsworth said. That approach, contained in draft legislation released in November by Senate Banking Committee Chairman Christopher Dodd, D-Conn., gives the SEC flexibility to carve out exemptions to allow for brokerage industry business models, he argued.
Marilyn Mohrman-Gillis, director of public policy for the Certified Financial Planner Board of Standards Inc., agreed with Mr. Tittsworth. “The fiduciary standard that is currently applied to advisers under the [Investment Advisers Act of 1940] ... which has been in existence for almost 70 years, is the standard that we believe should be applied to broker-dealers who are providing investment advice,” she said.
Kevin Carroll, managing director and associate general counsel of the Securities Industry and Financial Markets Association, strongly disagreed with that approach. Requiring all brokers who give advice to be investment adviser representatives “does not work for the brokerage industry,” he said. “It goes too far.”
“It sounds as if, when you talk about harmonization, it has to be a lowest common denominator,” said Patricia Struck, the Wisconsin securities administrator and chairwoman of the North American Securities Administrator Association Inc.'s Investment Adviser Section. “We have to be very careful to make sure that it is a high-enough standard to give the investors the protection that they think they are getting, and that they are really entitled to,” she said.
The fundamental question is whether the fiduciary standard works well, Mr. Carroll said. “The answer is no, it doesn't. It is unevenly applied. It is not definitive enough. It is state-by-state. Courts are the ones that decide how, or whether, it is applied, if at all.”
Mr. Carroll argued for allowing the SEC to write a new federal fiduciary standard for brokers who provide personalized advice. The new standard would be codified and regulated by the SEC “in a manner that the status quo fiduciary standard for advisers is not.”
Declaring that “the brokerage industry has come a long way,” Mr. Carroll criticized the advisory industry for not being willing to compromise. “When you show up to the reg reform debate with nothing but the status quo in your briefcase, it is hard to accept that you are serious about protecting investors,” he said.
“The fiduciary duty under the "40 Act isn't all it is cracked up to be,” agreed David Bellaire, general counsel and director of government relations for the Financial Services Institute Inc., which represents dually registered broker-dealer/ investment advisory firms. Advisers can escape acting in the best interests of their client under the fiduciary standard by putting obscure disclosures in their contracts or ADV disclosure forms, he said.
“What we have is a bumper-sticker definition that is used to convince investors that they have significant protections when, in fact, they do not,” Mr. Bellaire said. In addition, brokers are subject to other requirements, such as qualifying exams and continuing education, not required of investment advisers, he said.
On another issue, Mr. Bellaire made it clear that what the SEC decides to do about 12(b)-1 fees collected by the brokerage industry is “a key issue for our membership.” Abolishing the fees “would have wide-ranging and unintended consequences,” he said.
Without support from their brokers paid for by the fees, many investors would likely have sold their mutual funds at the bottom of the market and missed recent market growth, he argued.
But an idea floated by SEC officials to cap the fees probably would not have much effect, since the shares would be converted to A shares after a threshold amount was paid, he said. “We can see some merit in the idea of setting some reasonable limits,” he said.
E-mail Sara Hansard at [email protected].
