More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
Two of the nation’s top regulators—Mary Schapiro and Phyllis Borzi—continue to face a barrage of criticism over their decision to do what they believe is best for investors: expanding the definition of who’s a fiduciary.
While broadening the definition of fiduciary has many supporters, there are lawmakers and industry executives who vehemently argue that expanding the fiduciary definition is rife with unintended consequences, and that investors would likely suffer under a broadened standard by increased costs, limited choices and less access to financial advice. But despite these naysayers, both Schapiro, chairman of the Securities and Exchange Commission (SEC), and Borzi, head of the Department of Labor’s Employee Benefits Security Administration (EBSA), are charging ahead.
In his latest assault on the fiduciary standard being crafted by the SEC, Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, told Schapiro in an early August letter that the Commission has failed to “demonstrate that investors are being harmed by the current” fiduciary standard and that “harmonization” of advisor and broker rules would “enhance” investor protection.
Schapiro has stated a number of times that the SEC would move ahead with crafting a fiduciary standard for brokers after the one-year anniversary of Dodd-Frank, which hit on July 21. But Bachus argued in his letter that the SEC should instead be focused on the “mandatory” Dodd-Frank rulemakings, instead of pushing forward with a fiduciary rulemaking by “recalling examiners and reassigning them to write optional [fiduciary] rules.” The SEC should not be pressing ahead on the issue, the congressman said, because it has yet to provide Congress with “empirical data and economic analysis to justify” fiduciary or harmonization rules. Any action taken on these two fronts, Bachus said, “is premature” until the SEC answers these questions.
This isn’t Bachus’—or Congress’—first attempt to hinder Schapiro’s insistence on putting brokers under a fiduciary mandate, and it likely won’t be the last. In his letter, Bachus reminded Schapiro that Dodd-Frank does not mandate that the SEC put brokers under a fiduciary standard, only that it gives the regulator the authority to do so. What’s more, Bachus, like his counterpart Rep. Barney Frank, D-Mass., has urged Schapiro not to put brokers under the ’40 Act fiduciary standard that advisors must adhere to.
Bachus is also pushing legislation that would significantly alter the SEC’s structure. For good or ill, his SEC Modernization Act seeks to repair what he says is a flawed agency. The structure of the SEC “is the main problem,” Bachus said in introducing the bill, “and over the years Congress has only increased its dysfunctional structure through fragmentary and piecemeal amendments rather than the comprehensive reform that is needed.”
Bachus argues that throwing more funds at the SEC will not resolve the agency’s problems. He noted that the SEC’s budget this year stood at $1.185 billion, up 6% over 2010 “and nearly triple what it was a decade ago. Simply providing yet more funding to the SEC without first correcting its flaws will do nothing but prolong these inefficiencies and structural failures.” Further, he said that “without fundamental reform, there will never be any real improvement to the SEC’s operations.”
Most of the provisions in Bachus’ restructuring bill would amend Dodd-Frank, including Section 965, by consolidating the SEC Office of Compliance, Inspections and Examinations (OCIE) and its employees into the Divisions of Trading and Markets, and Investment Management. A new OCIE would be created within those divisions to house all examination, inspection and compliance staff. Each new office would have a deputy director who would report to their respective division director, the bill says. The SEC’s regional offices will report to the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.
Bachus’ legislation, along with Rep. Scott Garrett’s, R-N.J., bill, the SEC Regulatory Accountability Act (H.R. 2308), requiring the agency to perform enhanced cost/benefit analyses on its rules, will be “front and center” when the committee reschedules its hearing with SEC Chairman Mary Schapiro after Congress’ August break, says David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington.
Another battle is raging over the EBSA’s fiduciary proposal. Advisors are taking their objections to the EBSA’s controversial rule amending the definition of fiduciary straight to the White House. More than 3,000 letters to President Barack Obama were sent in late July and early August at the urging of the Financial Services Institute (FSI).
FSI and the DOL
FSI, the association of independent broker-dealers, has weighed in heavily on the Department of Labor’s proposed fiduciary rule. Chris Paulitz, FSI spokesman, says FSI believes the White House “is paying attention” to the more than 3,000 advisors’ letters challenging the rule. However, Paulitz says that in recent meetings that FSI has held with DOL officials, both Phyilis Borzi and others at Labor have “declined” to “slow down or pull back” from implementing the rule.
FSI has rallied its members to take their objections to President Obama and his chief of staff, William Daley. The advisors have sent letters to Obama complaining that the DOL’s rule would threaten their ability to help middle-class Americans plan for their retirement and would mean that they would no longer be able to provide unbiased, affordable advice to the individual retirement account (IRA) clients they currently serve.
Dale Brown, president of FSI, says that, “It has been clear for some time that the Department of Labor is refusing to recognize the serious problems with its fiduciary rule proposal.” That’s why FSI is “now taking our collective voice to the White House in an effort to preserve consumers’ access to affordable, independent retirement advice.”
Members of Congress from both sides of the aisle told Borzi at a July 26 hearing held by the House Subcommittee on Health, Employment, Labor and Pensions to re-propose the fiduciary rule because it’s too broad and because the EBSA failed to examine all the costs associated with its proposal.
But Borzi stated during that same hearing that EBSA was not likely to re-propose its fiduciary rule. “We had lots of public comments” on the fiduciary proposal, Borzi said, including “many of the issues we flagged for ourselves.” However, “nobody has suggested to us an alternative structure from the structure we’ve proposed” in EBSA’s fiduciary rule, she said.
Despite her refusal to re-propose the rule, Borzi has also emphasized the importance of having what she called a “thoughtful and deliberative process” regarding the fiduciary rule, which could mean that, in lieu of a re-proposal, the issuance date for the fiduciary rule could be extended into early 2012.