As the Continental Congress closed, Benjamin Franklin quipped that the delegates had just created, “A Republic … if you can keep it.”
These words ring with new meaning today as Washington policymakers seek new ways to pay for–as opposed to borrowing against–the cost of government. This is a good omen for the fiduciary standard, particularly the arguments made against the fiduciary standard asserting it’s “too costly.”
In a March 17 letter to the Securities and Exchange Commission (SEC), House Financial Subcommittee Chairman Scott Garrett, R-N.J., and several Republican members of the House Capital Markets Subcommittee laid out their concerns with the SEC “Staff Study on Investment Advisers and Broker Dealers,” released in January. The Study recommended applying the fiduciary standard that is “no less stringent than currently applied to investment advisers under the Investment Advisers Act of 1940” to brokers who “provide personalized investment advice” to investors. Garrett’s concerns asked whether the study “adequately justifies its recommendation,” or provides “adequate articulation or substantiation of the problem.” As such, the Republicans called for a thorough “cost benefit analysis” of the fiduciary standard.
The SEC Staff Study addressed costs and recounts comment letters suggesting a new uniform standard “might significantly increase costs for broker-dealers, which would then be passed on to retail investors….. some commenters indicated that litigation would increase…. [and this would] increase the cost of insurance for the firm.” The study notes, however, “None of the commenters provided any quantification of such anticipated costs” (emphasis added.) Also, “Commenters speculated” increased costs would cause many broker-dealers to stop offering certain products; while other commenters countered “the costs and impact on investor choice would be de minimis.”
As to “potential costs” to retail investors of a harmonized standard, the SEC study noted, “Commenters generally did not address whether or how additional harmonization of the broker-dealer and investment adviser regulatory regimes would impact investor choice.” So, “Generally, commenters did not quantify particular costs or even give a range of costs they would incur for various potential outcomes.”
Costs Always Concern Business
Costs always concern business. Regulatory costs are no exception. Costs associated with regulation are typically a tangible legal, operational, manufacturing or service provision cost. Stress tangible. Not so with upholding a legal standard. This explains why commenters limit themselves to heaving “concerns,” at the SEC, in lieu of independently verified costs in dollars-per-widget, for a portfolio, mutual fund or annuity.
This should not surprise. The costs of upholding conduct standards and rights of citizenship are not like, for example, the costs of regulating car sales. The costs of enforcing property rights? Privacy? Free speech? These protections are valuable; but do we know what they cost? Are they too costly? Good questions, yes. Credible answers, no. If there is not much in the way of independent, verifiable and quantifiable costs associated with upholding democratic principles and legal standards, how then do we expect to calculate the costs of fiduciary duties?
Figuring the costs of operating the federal government is different in kind compared with trying to figure the costs of maintaining a Republic. How, for example, would the markets price “eternal vigilance?”
In Part Two Rostad addresses why the discussion should focus on value as opposed to costs.