Brokers who work with individual investors will likely be able to continue charging commissions and pushing in-house products under a rule being written by the U.S. Securities and Exchange Commission aimed at improving their treatment of clients.
SEC Chairman Mary Schapiro said the rule-in-progress respects business differences between investment advisers, who already treat customers under a fiduciary duty that puts clients' best interests first, and broker-dealers who may soon have to do the same. The Dodd-Frank Act charged the SEC with studying how retail investors are treated and raising the standard for brokers if necessary.
“We want to be business-model neutral,” Schapiro said in an interview, responding to industry concerns that the rule might give advantages to one group over another.
Dodd-Frank permits the SEC's rule to protect clients without imposing a blanket ban on certain brokerage activities, Schapiro said.
“The statute makes it clear that principal-trading and proprietary products are OK, that charging brokerage commissions is OK,” she said.
Dodd-Frank didn't set a deadline for the agency to complete the rule. While the SEC originally planned to issue the regulation this year, Schapiro said it probably won't be completed until sometime in 2012.
The SEC “would have a mutiny” from brokers if the rule doesn't provide for continuation of common practices, said Stephen H. Cohen, who works with broker-dealers as a New York partner at Loeb & Loeb LLP. “All of these things would be conflicts of interest that would be prohibited” if the SEC simply moved the existing fiduciary standard from advisers to the broker world, he said.
More Stringent
Brokers are now held to a standard that they must give advice “suitable” to customers at the moment of the sale. In a study released in January, the SEC recommended brokers adopt a standard as stringent as the one for investment advisers while acknowledging differences in their roles.
Schapiro said the study “set it up pretty well” for the rulemaking. “There's a lot of flexibility for us to do something that I think would really advance the ball in investors' interests,” she said.
She added that her agency's economists continue to analyze the costs and benefits of a new standard. “We're still working on trying to put the data together and work constructively with market participants and investors on what a rule might look like,” Schapiro said.
Discretionary Rule
Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, the brokerage industry's lobbying group, said he wasn't surprised that the agency won't meet its stated deadline of finishing the regulation in 2011.
“Given the SEC's mandatory rulemaking under Dodd-Frank, it is not surprising that any rulemaking on fiduciary -- which is at the SEC's discretion -- has slipped in terms of timing,” he said.
A separate set of rules on the SEC's 2011 agenda that would change executive-pay practices for public companies will likely be addressed in mid-January, Schapiro said. Rules set to be proposed include so-called clawbacks of executive pay in cases of financial restatements, company disclosures of the ratio between their chief executive's pay and that of their median employee and disclosure of executive pay compared to a company's performance.
The SEC's new system to track trading across markets may still come by the end of the year; Shapiro said she is working to adopt the final version of the “consolidated audit trail” in coming weeks.
Surveillance Hub
“I'm very anxious to get consolidated audit trail done,” Schapiro said. The commission initially proposed the idea 20 days into the agency's efforts to figure out what happened during the May 2010 market crash that temporarily erased $862 billion in stock value. Once the commission approves the surveillance hub for trading data, the exchanges and the
Financial Industry Regulatory Authority will have to set it up.
A wide array of U.S.-listed companies is also waiting for disclosure rules about whether they use African “conflict minerals” in their manufacturing and what payments they make to foreign governments to extract oil and gas. Those rules remain on the 2011 calendar even as Meredith Cross, chief of the SEC's Division of Corporation Finance, has said it would be “challenging” to finish them this year.
The SEC has been “redoubling” its efforts to study cost- benefit effects of its new rules, Cross said at a Nov. 18 conference in Washington. A July 22 federal appeals court ruling rejected an agency regulation on shareholder rights, saying the SEC didn't properly explore the costs of the change.
--Bloomberg News
