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In the debate over how to shape a fiduciary mandate for brokers, Vanguard founder John Bogle says that the Securities and Exchange Commission (SEC) should include in its rule advisors to registered investment companies, which have been “ignored.”
While the Dodd-Frank Act allows the SEC to develop a fiduciary rule for brokers giving retail investment advice, Bogle told reporters Tuesday during a media briefing in Washington after meeting with SEC Chairwoman Mary Schapiro that the Investment Company Act of 1940 has been overlooked as the agency crafts its rule, and that “Dodd-Frank leaves a pretty wide open space” for the SEC to interpret what a fiduciary rule should look like.
(Bogle is the keynote speaker at the Investment Advisor Retirement Income Symposium on Oct. 4-5 in Boston.)
“As we develop a fiduciary standard, which is typically thought of as applying to retail advisors, I emphasized to [Schapiro] the fact that a fiduciary standard must, should and does include advisors to registered investment companies,” Bogle said during the briefing.
While industry observers have been adamant that the SEC’s fiduciary process has stalled, Schapiro told AdvisorOne in an interview Monday that while “it may appear from the outside it has stalled, work has been going on here [at the agency] to advance the issue.”
Schapiro, who spoke to AdvisorOne a day before the Tuesday meeting with heavyweights like Bogle and twelve other signatories to a “Fiduciary Declaration,” part of the Institute for the Fiduciary Standard's "Fiduciary September," said that the fiduciary issue remains “really important” and that she’s “ready to go” on releasing a request for information to allow the public to help inform a “more detailed” cost-benefit analysis on the agency’s fiduciary rule.
Bogle told reporters during the briefing that his “first point to [Schapiro] was that the reality is we are not only talking about retail advisors but institutional advisors, [advisors] to large financial institutions.” Financial institutions, he said, now own 70% of all stocks in America, with the mutual fund industry owning 52% of that number. “The power lies with financial institutions,” he said.
While mutual funds are already registered investment advisors under the Investment Advisers Act of 1940, and held to a fiduciary duty there, they also must adhere to a fiduciary duty under the preamble of the Investment Company Act of 1940.
Under that law, “mutual funds must be organized, operated and managed in the interest of their shareholders—a clear fiduciary standard that has never been enforced,” Bogle said. The Investment Company Act of 1940 “sits there and doesn’t get translated,” he said. “I’d like Congress to say there is a fiduciary standard in this country” under that act.
The SEC’s fiduciary rule is needed for retail advice, Bogle said, to rope in those brokers who aren’t held to a fiduciary duty under the act.
Indeed, Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), says that Bogle’s suggestions regarding institutional advisors are warranted in that there are “any number of institutional investors who aren’t all that sophisticated and who would benefit from the protections of a fiduciary duty.” However, “we’ve seen no evidence that the SEC is willing to push the boundaries in this area.”
Ron Rhoades, associate professor of Alfred State College's financial planning program, says that he respectfully disagrees with Bogle. "I don’t interpret the Dodd-Frank Act as giving the SEC authority to adopt different rules with respect to investment advisors to funds," Rhoades says. "However, investment advisors employed by funds who provide 'personalized investment advice' to 'retail customers' would be affected by SEC rulemaking in the fiduciary area."
But “Bogle raises another important issue,” Roper says: “That it is not enough to adopt a fiduciary duty, it has to be enforced. That is an ongoing challenge.”
Bogle said he also tried to “console” Schapiro regarding the pressure the agency has received regarding the need to perform a more thorough cost-benefit analysis on its fiduciary rule. “I reminded her that costs are easy to measure but benefits are hard to quantify,” he said. “How can you quantify the benefits of a fiduciary standard?”
Schapiro had originally announced in February that agency economists were getting ready to ask the public to weigh in on a set of questions regarding the agency’s economic analysis.
Declining to say whether a rule proposal would come by year-end, Schapiro said “it would be nice to get this final request for information.”
But Neil Simon, vice president of Government Relations for the Investment Adviser Association (IAA), says the holdup on releasing that request for information has been disagreement at the agency about what types of questions should be asked.
It's unlikely the SEC would be able to issue its request for information, examine the comments and issue a proposed rule by year-end. As Simon said, the SEC is “nowhere close” to voting on a fiduciary rule proposal.