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Conference committee agrees on a measure that calls for six-month study and then gives SEC authority to write single set of rules for advisors and brokers
June 25, 2010 — 3:36 AM UTC by Elizabeth MacBride
Against long odds and well-financed opposition, advocates for the fiduciary standard won an important victory yesterday when the House and Senate conference committee working on financial services reform decided to give the SEC authority to extend the fiduciary duty to broker-dealers.
A compromise reached in the early afternoon Thursday calls for a six-month study of the issue, and then says the SEC may issue rules under the Investment Advisor Act of 1940 that would apply to both broker-dealers and investment advisors when giving investment advice to retail clients. The rules would require that broker-dealers act in the best interests of their clients and that they disclose all conflicts of interest.
“We are celebrating. We are feeling much relieved,” said Neil Simon, government relations vice president for the Investment Adviser Association. “This would end the current situation where advice can be delivered under two very different standards.”
Though much depends on how — and how quickly — the SEC acts, the measure has far-reaching implications. Currently, investment advisors are fiduciaries and must act in the best interests of their clients; brokers act under a lower suitability standard that calls simply for their advice to be suitable for a client. See: The suitability standard, defined The new legislation could change that. For example, if brokers were acting under a fiduciary duty, they could not recommend a mutual fund that charged higher fees to a client if the broker knew of a comparable ETF with lower fees. See: How 10 top groups define 'fiduciary
Some people have argued that if brokers become fiduciaries, investment advisors lose one of the ways they differentiate themselves to clients. But advisor advocacy groups, including the IAA and the National Association of Personal Financial Planners, chose to align themselves on the side of advocates for consumers. Some people saw the afternoon’s events as a historic moment in the history of investor protection.
Small price to pay
“I’ve seen others complain about the six-month study included in the amendment,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “I disagree. Six months is a small price to pay for a reform we’ve been waiting for for decades.”
“We are delighted,” said Robert Glovsky, chair of the CFP Board of Standards.
Washington seems to be in a mindset of reform that extends beyond what Congress is empowering the SEC to do. In March, the Department of Labor took a similarly pro-fiduciary stance: See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs
The measure agreed upon in the conference committee is part of the financial reform legislation, which still must be approved by the House and Senate and signed into law by President Barack Obama.
There are some important carve-outs in the legislation that protect broker-dealers from too large a hit. The language in the measure is very similar to what passed in the House of Representatives late last year.
Reprieve for discount brokers
The fiduciary standard envisioned under the legislation would only apply to broker-dealers when they are giving advice to retail clients, not institutional ones. It also does not call for an ongoing standard of care for broker-dealers. That means that the fiduciary standard of care exists while the broker is giving advice, but not afterward. That carve-out was especially important to discount brokers, who may only see some clients one time for a single transaction. The legislation also says that on its own, receiving a commission is not considered a violation of fiduciary duty.
The most vocal opponents of extending the fiduciary duty were insurance brokers. The National Association of Insurance and Financial Advisors issued a measured response, praising the legislation for including the study provision, but adding:
“We are disappointed with the decision to allow the SEC to put in place a ‘best interest’ standard that will not tie directly to findings from the study. However, we support the House efforts to ensure that the ‘best interest’ standard recognizes that no broker-dealer and their registered representatives can violate the standard simply because they receive commissions and sell proprietary products.”
One reason that fiduciary advocates were celebrating nearly whole-heartedly, despite the carve-outs, is that just yesterday, the conference committee appeared poised to accept a proposal by Sen. Tim Johnson, a Democrat of South Dakota, that called for a longer study, did not contain strong language linking the new legislation back to the standard in the Investment Advisors Act of 1940, and appeared to lay the groundwork for FINRA to regulate advisors.
The measure that was agreed upon yesterday wasn’t ideal, said Simon, but “politics is the art of the possible.”
The SEC could still balk
Some fiduciary advocates raised doubts about whether the SEC actually will issue rules. The amendment to the legislation gives the SEC the authority to work on rules while the study is ongoing, and issue them after the study, but it does not require the commission to do so. Kristina Fausti, director of legal and regulatory affairs for Pittsburgh-based fi360, noted that the SEC is going to be charged with carrying out many of the new regulations in the nearly 2,000 page legislation.
“Its plate is full,” she said. “Fiduciary advocates will have a lot to keep their focus on.”
Ron Rhoades, RIABiz.com’s One-Man Think Tank columnist, said, “There’s an old saying about the SEC’s headquarters DC – “SIFMA owns the building”
However, there is reason to be hopeful, said Glovsky, that the SEC will take up the rule-making in a timely fashion. Many of the commissioners, including Mary Schapiro, are on record calling for a fiduciary duty for brokers.
“After disappointments over several years, this is a clear cut victory for investors,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard.
For a fuller story of the multi-year struggle to achieve this victory, see: The story behind this year’s surprise advancement of the fiduciary standard
Editor’s Note: Is this a victory or a loss for RIAs in your opinion? Please offer any thoughts below in the comments section!
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