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February 01, 2011 at 07:00 PM
All eyes this year will be focused on the exchanges that will ensue between lawmakers and the Securities and Exchange Commission (SEC) regarding putting brokers under a fiduciary mandate and appointing a self-regulatory organization (SRO) to help the SEC oversee advisors.
By the time you read this, the SEC will have delivered its report to Congress regarding whether to put brokers under a fiduciary standard of care and whether the agency will seek help from an SRO—which is likely inevitable seeing as the agency’s budget has been significantly hamstrung by the lack of any additional funding from Congress to carry out its mandates under Dodd-Frank.
At press time in early January, industry groups were voicing their concerns about what an SEC-crafted fiduciary standard of care may look like. For instance, the Committee for the Fiduciary Standard fears the SEC will institute a “disclosure-based” standard for brokers instead of a fiduciary standard, while the Investment Adviser Association (IAA) worries about the prospect of the SEC “defining” a fiduciary standard.
The SEC was to have sent its studies under Sections 913 (fiduciary duty) and 914 (need for SRO) of Dodd-Frank to the two newly installed Congressional chairmen: Rep. Spencer Bachus, R-Ala., of the House Financial Services Committee; and Sen. Tim Johnson, D-S.D., of the Senate Banking Committee.
A draft report requesting Congressional authority to appoint an SRO for advisors was also said to be circulating among the SEC Commissioners; the request did not specifically mention the Financial Industry Regulatory Authority (FINRA) as the preferred SRO, but industry officials say that a “general” recommendation regarding the need for one or more SROs was expected all along, and that FINRA is indeed still a candidate.
David Tittsworth, executive director of IAA, says that “FINRA is in the middle of this [SRO] debate, whether the [SEC] report says so or not.” FINRA, he continues, “has hired lobbyists to make their point on Capitol Hill and they are actively working the SEC. FINRA has a very large war chest—over $1 billion—and they are using it to make the case that they are ready and able to become the SRO for all or some portion of the investment advisory profession.”
The sticking point here is that Congress has the power to designate which SRO the SEC would use to help it oversee advisors. But as Tittsworth notes, “the SEC would probably seek broad authority” to designate any SRO for investment advisors. Remember that it was Rep. Bachus who wanted to insert FINRA as an overseer of advisors into the language of Dodd-Frank during the Congressional conference debate.
‘Fundamental’ Change on the Way
No doubt “fundamental changes” in how investment advisors are overseen are on the horizon this year, adds Barbara Roper, director of investor protection at the Consumer Federation of America (CFA). If Congress appoints an SRO, “that’s just the first step,” she says. “There are still a whole host of questions that arise on how that [SRO] is structured and, if FINRA plays a role, what changes it is required to make in its governance and structure to accommodate that expanded responsibility. How those decisions are made will determine whether this new approach to investment advisor oversight delivers appropriate protections to investors.” What is clear, she continues, “is that the status quo—with the SEC dependent on appropriations that allow for a once-a-decade inspection cycle—is not acceptable.”
How will the debate on fiduciary duty play out this year? Recent meetings the Committee for the Fiduciary Standard has had with the SEC as the agency was completing its study of the regulation of brokers and investment advisors prompted the Committee to shoot off a Jan. 3 letter to the SEC imploring the securities regulator to not adopt a disclosure-based standard. “Disclosure of conflicts, as opposed to avoidance or mitigation of conflicts, has become the central battlefield over whether the fiduciary standard survives,” Knut Rostad, chairman of the Committee for the Fiduciary Standard, told Investment Advisor. “The securities industry is pressing very hard for a casual disclosure-based standard that would, effectively, remove fiduciary duties when material conflicts are present.”
