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August 01, 2010 at 08:00 PM
By the time you read this, the Dodd-Frank financial services reform bill–The Wall Street Reform and Consumer Protection Act of 2010–will have been approved by both houses of Congress. As I’m writing, the Senate is still dragging its feet over passing the reconciled bill, so there may be a few more tweaks to the bill the House approved. As far as I can tell, however, no one is talking about changing the compromise wording concerning the fiduciary duty for brokers, so it’s a pretty good bet that how it reads now is how it will read in the final Act.
Beyond that, not much else is clear about the fiduciary standard, enabling both camps–those folks who are pro-fiduciary-standard-for-brokers and those anti-fiduciary-standard-for-brokers–to be claiming victory. Yet I still stand behind my proposition as it appeared in my July column. To wit, now that the mainstream media and the investing public are beginning to grasp which financial advisors are–and more importantly, which advisors aren’t–fiduciaries for their clients, it’s only a matter of time before the financial services industry morphs into some equivalent of “fiduciary-only” advice. What’s more, those advisors who already afford their clients a fiduciary duty can accelerate the transition to an industry-wide client-first standard by making the most out of the marketing advantage their fiduciary standard has suddenly become.
The ambiguity over expanding the fiduciary standard to brokers starts with the Dodd-Frank bill failing to give brokers a duty to put the interests of their clients first. Instead, Section 913 of the Act requires that the SEC conduct a six-month study of the ramifications of implementing such a standard, including “The effectiveness of existing legal or regulatory standards of care for brokers…,” and “whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for brokers, dealers, investment advisers… …for providing personalized investment advice about securities to retail customers that should be addressed by rule or statute.”
Of course, we and the SEC already know the answers to those questions thanks to a 2008 study conducted by the Rand Corporation for the Commission (which “explored industry and investor perspectives on customer relationships with financial service providers”). So, it would be easy to conclude the directive for a “new” study is simply a stalling tactic, designed to give the appearance of addressing the fiduciary question, while actually doing nothing except giving the media’s infantile attention span time to move on (not unlike our “closing” of the Guantanamo Bay prison).
Stalling Tactic That Backfired?
That undoubtedly was the thinking of opponents of a broker fiduciary standard who pushed for the study “solution.” But the pro-fiduciary forces in Congress weren’t so easily thwarted, inserting a clause of their own stating that should the SEC study warrant it, “…the Commission may promulgate rules to provide that, with respect to a broker or dealer, when providing personalized investment advice about securities to a retail customer, the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment advisor under section 21 of the Investment Advisors Act of 1940.”
For those of us who support a fiduciary standard of care for all financial advisors that give investment advice to the public, the use of the phrase “may promulgate rules” rather than “shall promulgate rules” is bad news, indeed. It means that even if its own study reveals the glaring need to protect retail customers with a broker duty to put the clients’ interests ahead of their own, the SEC can, at its own discretion, decide not to take any further action.
The good news, though, is the clear specificity of what action the Commission is …
… to take, should it decide to act: Rules that give brokers the same standard of care for their clients as investment advisors currently have under the ’40 Act. Make no mistake: This is big. It means that if the SEC decides to act, or feels politically compelled to act, it has very little wiggle room to create a watered-down standard for brokers. In essence, at least to my reading, Section 913 creates an all-or-nothing decision by the Chairman Mary Schapiro and her four co-commissioners.
