July 29, 2009

A Hail Mary Play: Is There Reason to Hope on Schapiro and the Fiduciary Standard?

Two weeks ago, the U.S. Treasury Department followed up the Obama Administration's white paper on financial reregulation by submitting to Congress proposed fiduciary standard legislation. It's an impressive piece of politics, to be sure: While saying all the right things about acting in the client's best interests, and "...prohibiting practices... ...contrary to the public interest...", the proposals fall short of actually taking any action. Instead, it deftly delegates the responsibility for writing the rules and regulations on these high-minded ideas over to Mary Schapiro at the SEC.

Still, the proposed standards contain three key elements that display a surprising grasp of the issues involved, and give the SEC all the expanded powers it needs to put brokers and investment advisors on the same level playing field, if the good folks at the Commission are of a mind to do so.

First, by amending the SEC Act of 1934, and the Investment Adviser Act of 1940, the Commission is empowered to set standards for "all brokers, dealers, and investment advisers... to act solely in the interest of the client or customer...."

Next, both Acts are amended to authorize the SEC to prohibit "sales practices, conflicts of interest, and compensation schemes...that it deems contrary to the public interest and the interests of investors." Finally, in a move that goes far beyond any of the proposals by even the most staunch fiduciary standard advocates (and I suspect, their wildest dreams) both Acts are further amended to empower the SEC to "prohibit...the use of agreements that require customers or clients...to arbitrate any future dispute...arising under the federal securities laws or the rules of a self-regulatory organization...."

Yes, you read that right: The SEC would be able to prohibit mandatory arbitration of FINRA rules. So, taken together, under these proposals, the SEC could (and "could" is the operative word here): put a fiduciary duty on brokers to place their customers' interests first, end commissions for brokers who give investment advice, and require that investment disputes be heard in open court.

Whether the SEC under Ms. Schapiro will actually do these things is anybody's guess. But at least the Obama Administration has provided a blueprint for sound consumer protection, and provided a pretty clear guideline to help the SEC to do the right thing.

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