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Regulation and Compliance > Federal Regulation > SEC

Exclusive Interview and Testimony, Schapiro Speaks on Investor Protection

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SEC Chairman Mary Schapiro outlined on March 26 steps the Commission is taking to beef up the Commission’s role in protecting investors. Testifying before the Senate Committee on Banking, Housing and Urban Affairs Schapiro said that, “As we look to the future of securities regulation, we believe that independence is an essential attribute of a capital markets regulator that protects investors. There are other agencies of government that touch on what we do, just as what we do touches on other agencies of government. But Congress created only one agency with the mandate to be the investors’ advocate.”

There has been much debate over, and lobbying by industry groups on, how to define and who should enforce a uniform standard of care, but the fiduciary standard seems to be gathering steam. Several groups, including the Investment Company Institute, The North American Securities Administrators Association, the Consumer Federation of America, and the Investment Adviser Association, as well as SEC Commissioner Luis Aguilar have called for a fiduciary standard of care for clients to apply for both investment advisors and broker/dealer reps, while Tim Ryan, president and CEO of the broker/dealer advocate Securities Industry and Financial Markets Association, is requesting a “fair dealing” standard. He testified before the same committee, chaired by Connecticut Democrat Chris Dodd, on March 10.

Chairman Schapiro told Wealth Manager in an exclusive interview on March 11 that the current crisis may be the catalyst that creates a mandate under which advisors of every stripe would have to adopt a fiduciary standard of care. “I’ve said for a long time that it’s really a flaw in our system that investors get different standards of care and different standards of regulatory protection depending on whether they’re going to an investment advisor, a registered rep, an insurance agent, or an unregulated advisor of some sort–and it’s not fair for us to leave to investors to figure out what protections they’re entitled to depending on which regulatory regime just happens to capture the person they’re dealing with. In some cases it may be wholly dependent on how the person is getting paid–if it’s fee-based then it’s the advisory regulatory regime and the fiduciary standard but if it is a registered rep of a broker/dealer without as broad a fiduciary duty–although I would argue they are fiduciaries for certain functions within the relationship–but a much different and more comprehensive regulatory regime. That’s just a terrible position that our system has put investors in–inadvertently–it’s evolved over time. But we have to sort out and look at investor protection from the perspective of the investor, not from the perspective of what registration category the provider of financial services just happens to fall into.”

SEC Seeks More Money and Examiners

Political hurdles aside, there are practical questions as well in bringing a fiduciary standard to those who serve investors. If broker/dealer reps are brought under the auspices of the SEC, then it would follow that enforcement may not be as daunting as it would appear to be at first blush, if, as is the case with investment advisors, investors could sue reps in court rather than go to arbitration. Of course, in an ideal world there would be intelligent enforcement that resulted in no reason to sue.

But is there enough money–and are there enough qualified people to enforce this? Chairman Schapiro asked the House Subcommittee on Financial Services and General Government (part of the Appropriations Committee) on March 11 to allow unused funds from the last fiscal year to be used in this fiscal year to help beef up enforcement. She told Wealth Manager that, “I think when you look at the advisory world, especially–we have 11,300 advisors registered with the SEC. We have about 400 people conducting examinations of advisors. By any measure that’s a really dangerous ratio because it means we effectively examine about 14% of advisors in any given year and that’s just too long a cycle. But the fact is there is a limit to the resources that we can get and I understand that we have to compete with a lot of other needs and demands in this country. So we also have to figure out a way to be much more risk-based in our approach and focus on those areas and those advisors who do in fact present danger to the investing public. Our challenge is twofold: it is to secure the resources we need but it’s to use them in a more effective way, supplemented by technology and other kinds of tools so we have a better, more risk-focused approach.”


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