All Eyes on SEC Chief to Move Fiduciary Forward, FINRA’s Ketchum Says

Meanwhile, SIFMA releases study challenging White House DOL figures at conference

Ketchum (left, with FSI's Dale Brown) told ThinkAdvisor that White is the "right person to lead us" to a best-interest standard. Ketchum (left, with FSI's Dale Brown) told ThinkAdvisor that White is the "right person to lead us" to a best-interest standard.

It’s time for the Securities and Exchange Commission to move on a “best-interest” fiduciary standard, and despite split views at the Commission on such a rule, SEC Chairwoman Mary Jo White can move it forward, Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said Monday.

It “would be far preferable to have a single, consistent [fiduciary] standard that operates out of the SEC across all [investment] vehicles that exist for the individual investor,” Ketchum said Monday morning during a question-and-answer session with Ira Hammerman, the Securities Industry and Financial Markets Association’s executive vice president and general counsel, at SIFMA’s Compliance and Legal Seminar in Phoenix.

Hammerman queried Ketchum on how White could “wrestle” a uniform fiduciary rulemaking to a resolution, given the polarizing views about such a rule among the SEC commissioners. “Nothing hard is easy; nothing worth doing is easy,” Ketchum responded, adding that while he has “tremendous respect” for the “range of concerns” expressed by some SEC commissioners regarding a fiduciary rule for brokers, he has “great confidence” in White being able “to move this [rulemaking] forward.”

Said Ketchum: “I’m confident that each of the commissioners recognizes the importance of the SEC playing a central role in defining a best interest of the customer standard for the industry.”

Ketchum said during the Q&A that “if there’s an impression in America that undisclosed backdoor payments are the driver of what goes on in the securities industry, that impression is false. Those payments would be illegal.” He was referring to comments made by President Barack Obama in a Feb. 23 speech at AARP endorsing the Department of Labor’s redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.

Any best interest standard, he continued, has to recognize that “significant change” needs to occur regarding disclosure and fees, and that that information should come “up front,” suggesting that BDs should have to disclose such information to clients in a format similar to the Form ADV that advisors give to their clients.

In a separate interview with ThinkAdvisor, Ketchum said he had “tremendous respect” for White. “It does seem to me that this is the right time to move to a consistent, single standard that is focused on the best interest of the customer, and I’m confident that she’s [White] the right person to lead us there.”

White is set to speak Tuesday at the SIFMA event in a Q&A with SIFMA president and CEO Ken Bentsen.

Hammerman told Ketchum it would be a “good idea” for FINRA to enter the fiduciary debate by sending a comment letter to DOL.

“We certainly would like to be part of the discussion,” Ketchum responded.

Ketchum told ThinkAdvisor that “we’re more than willing to be in a dialogue with the SEC and, for that matter, the Labor Department” on a fiduciary rulemaking. “We really care about moving to the best interest standard [and] we will be responsive to anything the SEC thinks we should move forward on” in this regard.

SIFMA released the same day a study titled “Review of the White House Report: ‘The Effects of Conflicted Investment Advice on Retirement Savings’” that it commissioned the National Economic Research Associates (NERA) to perform. SIFMA said the study identifies “flaws” in the White House’s Council of Economic Advisers' claim that such advice costs Americans $17 billion a year.

“The White House report posits that U.S. investors, in the aggregate, bear large costs because of the services provided by brokers who act in their own best interests, rather than the investors,’” the NERA report states. “While the report points to academic literature to support these aggregate cost estimates (a baseline number of $17 billion), the estimates are not directly found in the academic literature. Instead, the aggregate costs are calculated by the authors of the Report themselves, who make generalizations and extrapolations which they often do not fully support.”

The NERA report goes on to say that to calculate the aggregate estimate, “the authors of the report take the total value of load mutual funds in IRAs, plus the total value of annuities in IRAs, [which] at year-end 2013 stood at approximately $1.7 trillion. The report then claims that a survey of the academic literature supports a finding that savers lose about 1% per year due to conflicted payments. By multiplying these two numbers together, they produce the claimed aggregate cost number. This approach is flawed in multiple ways.”

The NERA report also states that the administration ignores the negative consequences of similar retirement regulations in the U.K., noting that “a sizeable number of low-balance clients lost their advisor. [Consultancy] Europe Economics finds that just in the first three months of 2014, about 310,000 clients stopped being served by their brokers because their wealth was too small for the broker to advise profitably.” An additional 60,000 investors were not accepted as new clients by brokers for the same reason over the same three months, NERA says.

Lisa Bleier, SIFMA's managing director, Public Policy and Advocacy, noted on a call with reporters that DOL sent its fiduciary redraft to the Office of Management and Budget on Feb. 23 and that the redraft “probably won’t be there for the full 90-day” review period. The measure will likely be proposed by DOL in spring or early summer, she predicted.

Bensten noted on the call the “strong bipartisan opposition” to the prior rule issued by DOL in 2010, stating that he believes “there is still a bipartisan” opposition to the direction DOL will take with its new plan.

He stated that the White House report is “at best simplistic and has some problems,” adding that as this fiduciary “process goes forward it’s important to lay out all the facts.”

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