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Regulatory Wire (Updated): To create a successful new regulatory regime, the biggest fears of both broker-dealers and advisors must be assuaged

Plus, a DOL administrator offers hints of new 401(k) regulations to come this fall

Author Sara Hansard May 14, 2010 at 5:38 AM
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If Congress passes financial reform, it only sets the stage for a new host of FINRA, SEC and DOL issues

401(k) Stories

Stephen Winks

Stephen Winks

May 14, 2010 — 2:23 PM

The simple elegant solution is the original Dodd Bill which dispenses with the broker exemption and establishes fiduciary standing for all those that render advice. Because the brokerage industry maintains brokers do not render advice as any advice which is provided is considered incidental to the trade execution services it provides, the brokerage industry does not have to change a thing as long as brokers do not render advice. This has proven to be a wonderful defense for the brokerage industry in arbitration proceedings, where the brokerage industry protects itself by making it clear that the broker was simply making the client aware of their investment alternatives, it was up to the consumer to determine investment merit on their own, regardless of how limited the investor’s knowledge and experience may be. The broker is invariably removed from any responsiblity for the investment recommendations they make.

But now the brokerage industry wants it both ways, where the broker can provide advice but not be held accountable to the same fiduciary standing of advisors.

If the brokerage industry wants to go beyond transactions where no advice is intended, implied or rendered then it simply must prepare to support advice that would safely bring fiduciary standing within the reach of every broker who would become an advisor. It is that simple.

This is a matter of principle that requires the proper resourcing of brokers so they can go beyond a buyer beware suitability standard where there is no accountability or ongoing obligation for investment recommendations, where cost is not a consideration, where tax efficiency is not a consideration, where there is no obligation to make a recommendation in the context of all a client’s holdings, where there is no transparency on compensation, where conflicts of interest are neither disclosed or managed.

All this is resolved with (a) prudent process (asset/liability study, investment policy, portfolio construction and management) tied to statutory documentation assuring fiduciary standing, (b) modern technology which provides transparency and accountability necessary for the continuous comprehensive counsel required for fiduciary standing, (c) a functional division of labor (Advisor, CAO, CIO) through which the advisor leverages, simplifing the execution of an extremely high level of fiduciary counsel, (d) advisory services support for each of the ten major market segments (mass, retail, HNW, Ultra HNW, DC, DB, Public Funds, Profit Sharing, Taft-Hartley, Foundations and Endowments) in which advisors are active, and (e) conflict of interest management going beyond simple disclosure.

Essentially the brokerage industry is pushing back on modernity prefering 70 year old regulation that was created before the emergence of computers and the massive dissemination of information. Though the brokerage industry does not want to modernize when it comes to the consumer, it will modernize when it comes to profiting in its own trading account. The consumer deserves better and the trust of the investing public has been greatly damaged.

Will the brokerage industry modernize because it is the right thing to do in the best interests of the consumer? Absolutely not, because they would have already done so. It is fighting tooth and nail and advancing misinformation in an attemp to assuage Congress. Congressional action is important because it is the SEC’s boss and has with held authority from the SEC to hold brokers to a fiduciary standing. The majority of SEC Commissioners support holding brokers to a fiduciary standard of care based on statute, case law and regulastory opinion letters which are not negotiable.

So will Congress which is charged with protecting the public trust, again place the best interest of the broker industry ahead of the best interest of the consumer and the advisor? We are about to find out. This is a very simple consideration, will the best interests of the investing public be served based on statute, case law and regulatory opinion letters which are non-negotiable?


Jan Sackley

Jan Sackley

May 14, 2010 — 2:46 PM

Sara’s reporting will be greatly missed as her understanding of issues is unparalleled. Thank you, Sara, for the information and insights you have provided financial professionals over the past many years.

Skip Schweiss

Skip Schweiss

May 14, 2010 — 9:15 PM

The link to the Collins amendment doesn’t work. Can someone point me to it?

Elizabeth MacBride

Elizabeth MacBride

May 14, 2010 — 10:03 PM

The link, which had expired, is now working again! Sorry for the problem.



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