The law governing how brokers serve their clients has done a poor job of keeping up with the realities of the marketplace, Harvey Pitt, a former chairman of the U.S. Securities and Exchange Commission, said today.
The SEC recommended in a staff report to Congress Jan. 21, 2011, called for by the Dodd-Frank financial overhaul law, that brokers and registered investment advisers who give personalized investment advice follow a uniform fiduciary standard.
Broker-dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when a product is sold, instead of the fiduciary duty followed by registered investment advisers to put their clients’ best interests first.
“The goal really is to say if I’m doing something more than just being an order taker, I am supposed to put the interest of my clients first,” Pitt said. “That seems to be the place where everyone ought to be able to agree. I don’t think you have to fuss with a separate definition and separate conduct.”
When writing rules for the fiduciary standard, the SEC has to take into account the services being provided and the legitimate expectations customers have, said Pitt, who was SEC chairman from 2001 to 2003, and now is chief executive officer of Kalorama Partners LLC, a Washington, D.C.-based consulting firm.
“It’s more complicated than the way it’s been teed up in Dodd-Frank,” he said. Most investors “start with the presumption that the professional who is working with them and to whom they entrust their capital are looking out for their best interests,” Pitt said.
The common standard is needed because many retail investors are confused by the roles played by investment advisers and broker-dealers, the SEC’s January study said. The agency’s effort to impose a fiduciary standard on brokers has been delayed for additional cost-benefit analysis, according to a Jan. 10 letter from Chairman Mary Schapiro to Representative Scott Garrett, a New Jersey Republican, who is chairman of the House Financial Services subcommittee that oversees the SEC.
“We’ve embraced a fiduciary standard for the industry,” as long as it’s nuanced and business-model neutral, said Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association, a lobbying group for banks and brokerages.
To contact the reporter on this story: Alexis Leondis in New York email@example.com