The Securities Industry and Financial Markets Association wants to delay the effective date of any new standard of care that the Securities and Exchange Commission may adopt for brokers giving advice to retail investors.
The broker-dealer community “will need sufficient time to implement training programs and to build systems to comply with any standard of care that is adopted,” SIFMA argues in a footnote at the end of a 16-page comment letter to the SEC on whether it should adopt a uniform standard of customer care for brokerage and advisory firms. “Thus, any new rule should have a delayed effective date to allow firms to adequately prepare for its implementation.”
Regulators themselves will need time to prepare for a variety of practical enforcement issues, the footnote said.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until the end of January to complete a study of the differing customer care standards of broker-dealers and investment advisers. After that, it has the authority to impose a common standard of care no less stringent than the fiduciary standard that governs advisers.
The securities industry's principal trade group devoted much of its comment letter to warning how much investors stand to lose if its members lose the right to make sales from their own inventories when executing customer orders because of restrictive conflict-of-interest rules that would require customers to approve principal trades on a case-by-case basis.
“If a uniform standard of care cannot be applied and supervised in a practical manner, broker-dealers will likely significantly curtail offering certain commission-based services and securities sold as principal,” the letter says, enumerating initial and follow-up public offerings of stocks and bonds that firms underwrite, as well as municipal bonds, proprietary mutual funds and structured products they sell as principal.
“A loss of access to these products and services would have the unintended consequence of seriously disadvantaging retail customers rather than protecting them,” the letter continued.
(Click here to view the letter.)
A rigid disclosure-and-consent protocol, it says with a further twist of the knife, will “significantly
harm retail investors” and impair capital formation in U.S. markets. Brokerage firms could not only restrict products and services they offer retail investors, but provide them at a significantly higher cost to meet new regulatory requirements or stop offering commission-based transaction accounts completely.
The commission model, the letter notes, is often less expensive than a fee-based one for retail customers who trade securities infrequently.
SIFMA urged the SEC to adopt a “layered approach to disclosure” that would begin with a general discussion of material conflicts of interest involving compensation, proprietary products, principal trading and the like in account opening documents. The documents could refer investors to a website with more detailed disclosure about particular products, and firms also could use the Internet for disclosure about particular trades at the time of sale, it said.
SIFMA asked the SEC to treat an investor's order to buy securities as proper consent, once disclosure has been made via the web.
Firms also could notify investors annually about material changes affecting disclosure, and retail customers would be deemed to have consented to the updates if they continue as clients, the trade group said. And SIFMA asked the SEC not to require existing customers to provide written consent to initial conflict-of-interest disclosures, saying contacting “millions of existing retail customers would be unduly burdensome and would provide no additional benefit or protection.”
Their consent, too, should be assumed if they continue to accept or use account services after disclosure, it said.
The SEC has at times frowned at such “negative consent” procedures.
SIFMA's comment letter also disclosed other areas of concern about the effect of a fiduciary standard on its members' business practices. Retail clients range in levels of sophistication and net worth, and on a daily basis ask their brokers for advice on sophisticated strategies — such as hedging concentrated positions in their employers' stocks, using options to hedge portfolios and taking risk to achieve above-average returns.
“Under a standard of care that the [SEC] adopts, however, a broker-dealer may determine that it could not provide personalized investment advice on an aggressive or sophisticated strategy to retail customers, even where the retail customer has sought advice and indicated his or her decision to employ an aggressive or sophisticated strategy, because it could be argued in hindsight that the strategy may not represent the ‘best interests' of such customer if more conservative options are available,” the letter said.
SIFMA urged the SEC to determine specifically whether broker-dealers would be prohibited from helping such “consenting retail customers,” rather than risk restricting the investors to a one-size-fits-all model that robs them of product and service choice.
The brokerage industry trade group's recommendation for specific guidance clashes with those of groups representing financial advisers who already adhere to a fiduciary standard. The Investment Advisers Association said in its comment letter that “it would be contrary to the interests of investor protection to attempt to define precisely all elements of the fiduciary duty,” while the Financial Planning Coalition told the regulator that it “should not mold the fiduciary standard to accommodate business models with substantial embedded conflicts of interest.”
