SEC Report May Urge U.S. Stockbrokers to Uphold Fiduciary Duty
The relationship between retail investors and those who advise them may be rewritten after the U.S. Securities and Exchange Commission releases three studies on the regulation of brokers and advisers.
The agency was asked by Congress in July to look at making brokers who give personalized advice follow a more stringent “fiduciary duty” that puts their clients’ best interests first when selling products. The SEC was also required to evaluate the examination of advisers and consider moving oversight to an outside organization. Both studies are expected next week, along with a third calling for recommendations about improving public access to background information on advisers.
Commissioners are still debating whether to make recommendations or present lawmakers with specific options, according to a person familiar with the discussion, who asked not to be identified because the studies haven’t been released. Though the reports mandated by the Dodd-Frank legislation may not turn into rules, SEC commissioners have pressed for changes. Congress did authorize the SEC to issue rules on the broker standard if a change is suggested in the study.
“Regulation of a financial professional should depend on what she does, and not what she calls herself or how she is paid,” said Commissioner Elisse Walter in a Feb. 25 speech. She also said she was pleased to see Congress “addressing this regulatory inconsistency, which has been allowed to exist for too long and results in just too much confusion.”
Having brokers follow the same fiduciary standard as registered investment advisers, based on the Investment Advisers Act of 1940, would mark a massive shift, and the brokerage industry has tried to alter that standard.
“If you are giving advice to an investor, regardless of the title on the business card, you should always be bound to do so in the best interests of the client,” SEC Commissioner Luis Aguilar said in a March 26 speech. Chairman Mary Schapiro, a Democrat like Walter and Aguilar, said in a May 6 speech that brokers “should meet that same high fiduciary standard.”
Broker-dealers currently are held to a “suitability” standard that calls for advice that meets their clients’ needs when the product is sold, instead of the fiduciary duty upheld by registered investment advisers. Industry groups, such as the Securities Industry and Financial Markets Association, support a “uniform federal fiduciary standard” for those dealing with retail clients, and have said the existing standard should be revised.
SIFMA said in a Nov. 17 letter to the SEC that any standard that may emerge from the six-month study due Jan. 21 must “reflect the many different business models currently in effect serving investors.”
“If you walk into a Ford dealership, the guy that walks up to you is not giving you advice,” said Michael Aronstein, president of New York-based Marketfield Asset Management, a registered investment adviser. “If you want to sell something, that’s fine,” he said. “On your card, it should say registered sales representative. Period.”
Harold Evensky, president of Coral Gables, Florida-based Evensky & Katz Wealth Management, said he’s concerned there will be a redefining of fiduciary just to equate it with more disclosure, “which would be a staggering watering down of real fiduciary duty.”
There has been a “lack of certainty in the marketplace today on just what level of duty is owed to me by whatever shop I happen to walk into on Main Street,” Representative Scott Garrett, the new chairman of the House of Representatives’ capital markets subcommittee, said in an interview. “There’s no simple solution to that.”
Another report from the SEC may recommend that Congress enact legislation authorizing the SEC to designate one or more self-regulatory organizations for investment advisers.
“I am open to that idea,” said Garrett, a Republican from New Jersey, who said he hasn’t made a final decision because he’s waiting for the study. The Dodd-Frank act increased the adviser asset threshold to $100 million from $25 million for those required to register with the SEC, which will shift an estimated 4,000 smaller advisers from SEC to state oversight.
Aguilar has opposed creating another regulator and said in a 2009 speech that moving oversight would be “a more costly alternative than if you simply provided the SEC with adequate resources.” The “SEC should not outsource its mission,” he said.
SEC Chairman Schapiro won’t be able to weigh in because she has recused herself, according to a person familiar with her decision, who asked not to be identified because her decision hasn’t been announced. Schapiro was chief executive officer of the Financial Industry Regulatory Authority, the independent securities regulator, which is interested in assuming investment adviser oversight. She was appointed under President Barack Obama’s executive order that incoming officials would not make decisions affecting their previous employers for two years.
“We are well-positioned to help in that area, if the SEC and Congress decide that a self-regulatory organization is necessary,” Howard Schloss, Finra’s executive vice president in charge of government relations, said in an interview. “The SEC, as it has stated in the past, can only examine and only plans to examine this year about 9 percent of investment advisers,” Schloss said. “That’s a disservice to investors.”
SEC-registered investment advisers are examined on average once every 10 years, according to David Tittsworth, executive director of the Investment Adviser Association in Washington. “We agree we need more inspection, but the self-regulatory organization route isn’t right,” he said.
‘Lack of Transparency’
Tittsworth, whose group represents registered investment advisers, said the SEC should be given “the resources it needs to do its job.” He said his group strongly opposes Finra stepping in to oversee about 7,000 advisers, because it has “a lack of accountability and a lack of transparency.” He said he’d prefer advisers pay user fees to the SEC to fund additional oversight.
Because of the SEC’s budget trouble, oversight for independent registered investment advisers “would be enhanced by a self-regulatory organization,” Ira Hammerman, senior managing director and general counsel for Sifma, said in a Jan. 12 letter to the SEC. If there is a self-regulator, there must be a “fresh start” in how the examination program would work for the adviser model, Hammerman said.
The study on regulation is due Monday, according to the act. Since that’s a federal holiday, it could be released Tuesday. It didn’t come with congressional authorization to write a rule, so the matter would return to Congress for any potential legislation.
A third study due Jan. 21 is supposed to make recommendations on “ways to improve the access of investors to registration information” on investment advisers and brokers.