As the Continental Congress closed, Benjamin Franklin quipped that the delegates had just created, “A Republic … if you can keep it.”
These words ring with new meaning today as Washington policymakers seek new ways to pay for–as opposed to borrowing against–the cost of government. This is a good omen for the fiduciary standard, particularly the arguments made against the fiduciary standard asserting it’s “too costly.”
In a March 17 letter to the Securities and Exchange Commission (SEC), House Financial Subcommittee Chairman Scott Garrett, R-N.J., and several Republican members of the House Capital Markets Subcommittee laid out their concerns with the SEC “Staff Study on Investment Advisers and Broker Dealers,” released in January. The Study recommended applying the fiduciary standard that is “no less stringent than currently applied to investment advisers under the Investment Advisers Act of 1940” to brokers who “provide personalized investment advice” to investors. Garrett’s concerns asked whether the study “adequately justifies its recommendation,” or provides “adequate articulation or substantiation of the problem.” As such, the Republicans called for a thorough “cost benefit analysis” of the fiduciary standard.
The SEC Staff Study addressed costs and recounts comment letters suggesting a new uniform standard “might significantly increase costs for broker-dealers, which would then be passed on to retail investors….. some commenters indicated that litigation would increase…. [and this would] increase the cost of insurance for the firm.” The study notes, however, “None of the commenters provided any quantification of such anticipated costs” (emphasis added.) Also, “Commenters speculated” increased costs would cause many broker-dealers to stop offering certain products; while other commenters countered “the costs and impact on investor choice would be de minimis.”
As to “potential costs” to retail investors of a harmonized standard, the SEC study noted, “Commenters generally did not address whether or how additional harmonization of the broker-dealer and investment adviser regulatory regimes would impact investor choice.” So, “Generally, commenters did not quantify particular costs or even give a range of costs they would incur for various potential outcomes.”