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May 01, 2011 at 08:00 PM
I don’t usually write about politics, except when it has a direct impact on financial advice, and this appears to be one of those times. It’s extremely unfortunate that political discourse in America these days has devolved into being either very much for something, or very much against it—polarizing virtually every serious issue far beyond the actual facts or clear-headed analysis. We pass massive “reform” legislation without first determining the cause and nature of the “problem” (or apparently even reading the laws themselves); we’re absolutely sure humans are dramatically altering the global climate with no review of or even knowledge of the scientific evidence either way; and the debacle in Iraq undoubtedly would have come out far differently if we’d had a serious debate about our plans, our goals, and how we’ll know when it’s time to come home. I suspect much of the blame for our polarization falls on the media—nuance, subtlety and rational thought don’t seem to fit well into sound bites—and politicians who play to that audience.
It’s equally unfortunate that the fiduciary standard for brokers seems to have fallen into one of our ideological non-debates: over government regulation. The Democrats seem to feel that virtually all of our problems can be solved with increased regulation, while the Republicans apparently are driven to reduce regulation indiscriminately. Now that the Republicans are in the control of the House of Representatives, they’ve directed the SEC to hold off on the fiduciary duty standard, pending further study of the need for this additional regulation. The irony is that if done right, expanding the fiduciary standard to include brokers would actually reduce regulation, not increase it.
The Republicans made their wishes regarding the fiduciary standard known in a letter on March 17, 2011 from the party’s members on the House Financial Services Subcommittee led by Chairman Scott Garrett, R-N.J., to SEC Chairman Mary Schapiro. The letter states that although the Dodd-Frank Act’s Section 913 gives the SEC the “discretion to adopt a fiduciary duty rule [for brokers]…it does not mandate it, ands in no way suggests a congressional intent that the Commission move forward on such a rulemaking without sufficient basis.” The House Republicans go on to say that in their view “the Commission has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis upon which to move forward.”
This letter, of course, echoes the dissenting statement by Commissioners Kathleen Casey and Troy Paredes that was attached to the SEC’s Jan. 21, 2011 Study on Investment Advisors and Broker-Dealers. In their statement, the two Commissioners say the SEC Study “…fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors…. Indeed, the Study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the Study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection.”
Both of these statements are curious and, I believe, revealing of the various agendas at play in this increasingly complex debate. The central issue here is whether brokers should be subjected to the same fiduciary standard to put their clients’ interests first that currently governs registered investment advisors. It seems to defy common sense that such a standard could fail to “enhance investor protection.” But notice that the dissenting commissioners don’t directly take issue with a fiduciary standard, but rather with “changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors.”
Likewise, the House Republicans don’t take issue with a fiduciary standard for brokers either, but merely claim the SEC hasn’t identified a clear problem for which new “rulemaking” would be the solution. Section 3 of the Study, entitled “Retail Investor Perceptions and Confusion Regarding Financial Service Provider Obligations and Standard of Conduct,” cites numerous “comment letters” and three major studies that clearly spelled out the scope of “the problem.”
