May 11, 2011

CFA to Congress: Cost-Benefit Analysis Will Hamstring SEC's Fiduciary Rulemaking Process

In recent AdvisorOne interview, SEC's Schapiro signaled that lawmakers' cost-benefit requests 'haven't changed anything'

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Consumer advocates are urging members of Congress to not hamstring the Securities and Exchange Commission’s (SEC) efforts to craft a rule to put brokers under the same fiduciary standard as advisors by requiring a further cost-benefit analysis on such a rulemaking.

Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), told members of the House Financial Services Committee in a May 9 letter “not to be swayed by misleading arguments from self-interested financial services groups” that a further cost-benefit analysis is needed on a fiduciary duty rule.

Roper noted in her letter that the SEC’s study regarding fiduciary duty, required under Section 913 of Dodd-Frank, “has won praise from leading broker-dealer trade associations as well as from traditional fiduciary advocates.” Despite that “important progress,” Roper continued, “some Members of Congress have written to SEC Chairman Mary Schapiro in recent weeks urging the agency to delay any rulemaking until it has done more study of the potential economic consequences.”

Those letters seeking to delay the rule “appear to have been influenced, at least in part, by misleading arguments from a small segment of the broker-dealer community intent on maintaining the status quo,” Roper wrote. “These brokers, particularly those whose business model depends on the sale of high-cost variable annuities, have argued that imposing a fiduciary duty on investment advice by brokers could have ‘unintended consequences,’ particularly for middle income and rural investors.”

Sen. Richard Shelby, R-Ala., ranking member on the Senate Banking Committee, along with other GOP members of the committee, wrote a May 4 letter to the Inspectors General at the SEC, FDIC, Commodities Futures Trading Commission (CFTC), the Treasury Department, and the Federal Reserve Board, asking that they “initiate a review of the economic analysis” performed by the regulatory agency under their supervision.

Members of the committee, Shelby said in the letter, are concerned that regulatory agencies are “conducting rulemakings to implement Dodd-Frank without adequately considering the costs and benefits of their rules and the effects of those rules could have on the economy.”

rep. scott garrettRep. Scott Garrett (left), R-N.J., chairman of the House Subcommittee on Capital Markets, along with other GOP members of the committee, told Schapiro in a March letterthat the SEC lacked a “solid basis” for moving forward with a fiduciary duty and that a further cost-benefit analysis on a such a rule was needed.

However, in a recent interview with AdvisorOne, Schapiro signaled that the Garrett letter “hasn’t changed anything” regarding how the SEC is moving along with its cost-benefit analysis regarding a fiduciary duty rule.  

As with all SEC rules, “any particular rulemaking that comes out of the fiduciary study would have to include a detailed cost-benefit analysis in the proposal,” Schapiro told AdvisorOne. “So we’ve always known we would have to do that when we got to the point we would write [fiduciary] rules—if that’s what the Commission chooses to do—coming out of the study.” When the SEC proposes a rule, Schapiro continued, “the cost-benefit analysis would be included, we would ask for comment on our cost and benefit estimates, and then when we go to adopt the rule, we would do a more defined cost-benefit analysis. So it’s very much the way we always operate.”

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