Comments letters to financial regulators about potential new rules can drone on for dozens of pages. It's likely that the vast majority of people who wade through the often dense, soporific prose are those who are paid to read them – in the agencies, media or at advocacy groups.
On Tuesday, however, the gist of such missives about the standard of care for retail investment advice came to life at a
forum at the Cato Institute in Washington. Co-sponsored by Institute for the Fiduciary Standard, the event wrapped up the organization's “Fiduciary September” initiative designed to light a fire under a stalled fiduciary-duty rule at the Securities and Exchange Commission.
During the second panel of the forum, Ron Rhoades, assistant professor at Alfred State College and a leading proponent of universal fiduciary duty, said that the rulemaking process has halted because only two of five SEC commissioners support the publication of a document that would serve as the foundation for a cost-benefit analysis that must precede a new regulation.
The
Institute for the Fiduciary Standard has been asserting all month that the SEC is being pressured by the financial industry to slow-walk a fiduciary-duty rule, which would force brokers to meet the investment-adviser care standard and act in the best interest of their clients.
When that point was made again at Tuesday's forum, it was challenged by an official of the Securities Industry and Financial Markets Association who was sitting a row behind me in the audience.
Kevin Carroll, SIFMA managing director and associate general counsel, said that SIFMA supports a universal fiduciary duty rule. But, as pointed out in its
fiduciary framework letter to the SEC last year, it wants the agency to develop a new standard that applies to brokers and advisers equally.
“We don't want the [19]40 [Investment Advisers] Act standard superimposed on us,” Mr. Carroll told the Cato gathering. “SIFMA wants these new [fiduciary] rules. That's what's causing the delay at the SEC – is how to articulate these rules.”
That rejoinder sparked a lively exchange near the end of the forum. The audience was treated to a sort of live-action comment letter debate.
Mr. Rhoades responded that the Dodd-Frank financial reform law did not require the SEC to develop a new fiduciary-duty standard. It gave the SEC the authority to promulgate a universal fiduciary-duty regulation that is “no less stringent” than the 1940 Act.
The SIFMA proposal falls far short, according to Mr. Rhoades, who was in line to become chairman of the National Association of Personal Financial Advisors before a state compliance violation with his advisory firm forced him to step down. The problem has since been resolved.
“It's just disclosure,” Mr. Rhoades said of the SIFMA framework. “It's not a true fiduciary standard.”
Knut Rostad, president of the Institute for Fiduciary Standard, also chimed in, saying that the fiduciary requirement his group envisions is in line with the 1940 law.
“What's being advocated by the securities industry doesn't meet that standard,” Mr. Rostad said.
In an interview after the forum, Mr. Carroll said that fiduciary duty is not spelled out in the 1940 law. SIFMA is seeking clarity from the SEC on how brokers should operate under a new standard-of-care rule.
“Advisers don't know how to comply with it,” Mr. Carroll said. “Investors don't know what it means. Why can't we articulate it through SEC rules?”
That would require the SEC to issue a fiduciary-duty proposal, a step that may be years away.
