Agency is signaling that it first may adjust the rules governing brokers and investment advisers
As the Securities and Exchange Commission embarks on an effort to quantify the impact on the financial markets of increasing investment advice standards for brokers, it is signaling that it first may adjust the rules governing brokers and investment advisers.
In a 72-page request for information released March 1, the agency said it is undertaking “a broad consideration of harmonization of regulatory obligations” in areas such as advertising, the use of solicitors, supervision, licensing and registration, continuing educ-
ation, and books and records.
Some adviser advocates are worried about what the SEC has in mind.
“It looks as if the SEC is holding open the option of moving forward on rules harmonization in lieu of a fiduciary standard,” said Duane Thompson, senior policy analyst at fi360 Inc. “If that happens, it would be a disaster for investors and investment advisers in terms of additional compliance costs.”
The threat of harmonization is that it could foist on advisers a rules-based regime like the one that brokers must follow. That would raise the cost of doing business for advisory firms, which often are small, Mr. Thompson said.
“These kinds of rules are the types of things that will drive [advisers] out of business or make it hard to set up your own firm,” Mr. Thompson said. “It’s going to be more of a one-size-fits-all standard.”
COST-BENEFIT ANALYSIS
The SEC is collecting data over the next four months to use in a cost-benefit analysis for a potential rule that would force brokers to meet the best-interests standard, a more stringent requirement than the suitability rule they now follow when selling investment products.
The launch of the analysis comes nearly a year after the SEC said it would conduct such a study and more than two and a half years since the Dodd-Frank financial reform law gave the agency the authority to promulgate a uniform-fiduciary-duty rule.
The cost-benefit analysis will help the SEC determine whether to proceed to rule making. Foes of such a regulation have demanded that it be justified by an economic analysis.
Some fiduciary advocates are wary of the parameters that the SEC uses to guide the data submissions. It outlined “assumptions” about how a uniform fiduciary standard would work, such as allowing brokers to charge commissions, not requiring a continuing duty of loyalty and care to clients, and applying a fiduciary standard within the confines of a contract.
The SEC states several times that these assumptions do not reflect the agency’s policy views or the direction it might go on a fiduciary-duty rule.
Nonetheless, one fiduciary advocate worries that the document downplays conflicts of interest for brokers who sell their firms’ products to their clients.
“The entire emphasis of this language is on disclosure,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “This is turning [the adviser] world upside down.”
One group that is concerned about how a uniform-fiduciary-duty standard would be implemented — the National Association of Insurance and Financial Advisors — is happy with the measured pace the SEC is taking.
The group says it is not opposed to a fiduciary-duty standard but wants to insure that the insurance business model is not undermined by a uniform benchmark.
“We do not want to do anything to disenfranchise the middle market from products, services and advice,” said Terry Headley, a former NAIFA president and head of Headley Financial Group. “We want to make sure investors have the freedom of choice in how they engage advisers and how they choose to compensate them.”
Over the next four months, NAIFA and other groups will have a chance to win over the SEC, with hard data.
