What Lack of SEC Funding Means for Dodd-Frank, SRO Likelihood

examiners working out of its regional offices and to freeze hiring for non-critical positions.

But Trone (left) is confident that the SEC’s funding status will not impact the timing of the SEC’s report to Congress on fiduciary duty, which is due on Jan. 21. While Trone does see the SEC instituting a fiduciary duty for brokers, he says that he “doesn’t think the SEC should, or will, attempt to paint every broker with a fiduciary brush. The public will continue to be well-served by traditional brokers who have expertise in selling financial products, have the capacity to execute trades, or provide clients direct access to capital markets (principal trades, IPOs).”

However, Trone continues, “I do believe the SEC will define a fiduciary standard for brokers who are providing retail clients comprehensive and continuous investment advice,” which means “the wide grey expanse which now lies between a suitability and fiduciary will become a bright line.” Trone says he foresees a compliance date of January 2012 for brokers to comply with any fiduciary standards rule the SEC enacts.

The lack of funds for the SEC also increases the likelihood that the SEC will seek Congressional authority to appoint an SRO for advisors. As David Bellaire, general counsel and director of government affairs for the Financial Services Institute (FSI) notes: “The SEC’s inability to secure the necessary funding to implement the requirements of Dodd-Frank highlights the need for creative approaches to regulatory oversight.” This lack of funding, he continues, “is why FSI supports FINRA as the self-regulatory organization for investment advisers. The bottom line is that FINRA is the only viable option available to bolster investor protection for advisory clients.” Other industry groups like IAA oppose FINRA as an SRO for advisors, but Tittsworth concedes that the SEC’s funding uncertainty “could bolster attempts” to establish an SRO for advisors. “FINRA and others will use the lack of SEC funding to bolster their arguments that a self-regulatory organization is needed to increase the frequency of examinations–at no cost to taxpayers,” Tittsworth says.

David Massey (left), president of the North American Securities Administrators Association (NASAA) who regularly blogs for AdvisorOne.com, notes that while the SEC's examination of advisors has been "eased somewhat" by the shifting of about 4,000 advisors to state regulators, "it would be a shame to see legislative intent of Dodd-Frank thwarted by the unwillingness of some in Congress to properly fund the SEC during the implementation phase of this vital investor protection legislation."