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When the Securities and Exchange Commission issued in January a study recommending a single fiduciary standard for broker-dealers and investment advisors, one might easily have surmised the SEC was prepared for the next step: drafting a proposed rule that defines the standard.

It’s evident now that a harmonized standard is a long way from being realized–possibly years. That’s my key take-away from a recent panel discussion on the topic. Hosted by the New York Law School on February 10, the event brought together six experts, including a top exec of the Financial Industry Regulatory Authority, Thomas Selman, who have analyzed the SEC’s work on the standard to date.

Peering into the Report

Why the pessimism? Let’s start with page one of the study, which notes that the commissioners expressed “no view regarding the analysis, findings or conclusions” contained in the staff-written, 208-page report. The hands-off stance, as SEC Chairman Mary Shapiro has acknowledged, is likely to slow progress.

Secondly, there is discord among the SEC commissioners. As pointed out by Michael Koffler, a panelist and partner at Sutherland Asbill & Brennan, New York, two of the five commissioners–both Republicans–disagreed with the decision to release the report, believing the subject requires further study.

Among their concerns is that the study draws conclusions without adequately explaining how investors are being harmed by the existing regulatory regimes: one for broker-dealers under the Securities Exchange Act of 1934; the other for investment advisors under the Investment Advisers Act of 1940. The dissenters also say the study fails to offer a well reasoned explanation as to how a uniform standard would enhance investor protection.

What is more, as the panelists noted, the study’s recommendations lack specificity. The report concludes that a fiduciary standard should be “no less stringent” than the one currently applied to investment advisors; and that a harmonized standard should integrate the “best elements” of both B-D and IA regulatory regimes. Beyond these laudable objectives, however, the study offers no detailed blueprint for the path ahead.

Weighing the Key Issues

Eventually, the commissioners will have to reach a consensus on some thorny issues. Chief among these is how to formulate a meaningful standard without compromising the broker-dealer model.

For Knut Rostad, a panelist and chairman of the Committee for the Fiduciary Standard, Falls Church, Va., the main issue is the “duty of loyalty and care” required of broker-dealers regarding the study’s recommendation to “eliminate or disclose conflicts of interest.” If a B-D discloses a conflict, but does not put the investor’s interests first, then the fiduciary standard will be insufficiently rigorous, he said.

Responsibilities to the investor aside, the SEC commissioners will also have to decide how broker-dealers and investments advisors will be regulated–and examined–under a uniform standard. Thomas Selman, an executive vice president of regulatory policy at FINRA, said that Congress is unlikely to tap FINRA as the self-regulatory organization for investment advisors.

Even if FINRA and the SEC continue in their current roles, the two organizations will likely have to make changes to their governing structures under a uniform standard. Rules that currently apply to B-Ds (with respect to commission rates, for example) may not be applicable to IAs. Conversely, the SEC would do well to extend to investment advisors FINRA regulations governing (among other things) the use of marketing literature.

Still other issues, as the panelists pointed out, will have to be addressed. How, for instance, will examinations be conducted across both the B-D and IA communities? Currently, just 9% of all advisors are examined. If that percentage is to be increased, then exams may need to be funded with user fees or other revenue.

Examiners may also need additional training. Many FINRA examiners of dually registered advisors conflate a core investment advisor function (portfolio management) with that of a broker-dealer (selling and distributing securities). As keynote speaker and TD Ameritrade President Tom Bradley noted, these examiners have to recognize portfolio management as a distinct discipline if they’re to function more effectively.

A More Realistic Timeline

There remain, in sum, a host of questions that will have to be resolved before a uniform fiduciary standard becomes reality. The SEC study’s recommendations–or lack thereof–and substantive differences among the commissioners do not instill great confidence that we’ll soon have a standard. All of which translates to an extended period of uncertainty for broker-dealers.