Danger & Opportunity: Financial Services Reform Bill Inevitable

An issue that’s paramount to investment advisors and broker/dealers, of course, is whether financial services reform legislation that’s passed this year will include requiring broker/dealers that provide investment advice to adhere to the same fiduciary standard as advisors. Kristina Fausti, director of legal and regulatory affairs for Fiduciary 360 (fi360), says that since the Obama Administration’s regulatory overhaul proposal included applying the fiduciary standard to B/Ds, she’s confident that the Administration will “push for this.” Plus, she says, members of Congress are willing to consider proposals that deal with investor protection. But whether the fiduciary standard will be included in reform legislation that gets passed this year is unclear.

Fausti says that SEC Chairman Mary Schapiro is waiting for the green light from Congress before she tackles crafting a fiduciary standard for B/Ds on her own. The Committee for the Fiduciary Standard, of which Fausti is a member–along with WealthManagerWeb Editor-in-Chief Kate McBride–met with Schapiro on September 11 at her invitation, and during the meeting Schapiro “made clear that she does not think that the SEC has enough authority to do anything with the fiduciary standard on its own right now,” Fausti says. Schapiro is waiting for Congress to issue legislation that provides “direction and timelines” on implementing a fiduciary standard.

Once that legislation comes out, it will be up to the SEC “to answer some very hard, practical questions and give good guidance on what the fiduciary standard is and how it applies to a lot of different situations,” Fausti says. This is what Schapiro “is most concerned with”–how the fiduciary standard will be applied.

While Schapiro’s stance remains intact that broker/dealers who provide investment advice should follow the same fiduciary standard as investment advisors, Fausti says, Schapiro said during the meeting that she fears that once a fiduciary standard gets adopted and becomes “more widespread,” that “some sort of false hope is given to the public.” Considering the large number of Ponzi schemes orchestrated by investment advisors that the SEC has uncovered since the Bernie Madoff fraud was revealed, Schapiro is “concerned about the SEC doing enough to back that up [the new fiduciary standard being applied], and prevent Madoffs and fraudsters that are out there,” Fausti says. But Fausti says the Fiduciary Committee told Schapiro that “there will always be fraudsters” and that the SEC “still needs to put the [fiduciary] bar where it needs to be.”