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July 01, 2011 at 08:00 PM
D-day has arrived: Later this month the Securities and Exchange Commission (SEC) will turn its attention to the daunting task of not only crafting a fiduciary duty rule for brokers, but also reworking mutual fund distribution fees under Rule 12b-1. As SEC Chairman Mary Schapiro said recently—the Commission will deal with these two issues “in tandem.”
The House, too, still plans to hold hearings on the SEC’s studies under Sections 913 (fiduciary duty) and 914 (self-regulatory organization) of Dodd-Frank before Congress’s August recess. As Schapiro said recently, all three options put forth in the SEC’s study to Congress—one or more SROs, extension of FINRA oversight over advisors, or imposing user fees to fund advisor exams—would require legislation to “move forward.”
As the July deadline approaches, lobbying efforts have heated up in the past few months, with industry executives like Mark Casady, CEO of LPL Financial, publicly airing his views on what he sees as an “extremely uneven” regulatory playing field that favors advisors over brokers.
Even Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, shipped a letter to Schapiro urging the SEC not to put brokers under the Investment Advisers Act fiduciary standard. Frank told Schapiro that while Section 913 of Dodd-Frank gives the SEC the authority to establish a new fiduciary standard of care for broker-dealers, “the requirement that the new standard be ‘no less stringent’ …was not intended to encourage the SEC to impose the Investment Advisers Act standard on broker-dealers, but to ensure the new standard would not be a ‘watered down’ version of the investment advisors’ fiduciary standard.”
It was Frank who fought vigorously to have a fiduciary standard for brokers inserted into Dodd-Frank, so industry executives have been somewhat perplexed by his insistence that a newly crafted fiduciary standard “recognize and appropriately adapt to differences” between brokers and advisors. Despite his comment that the SEC should not “simply copy” the Investment Adviser Act standard for brokers, Kristina Fausti, director of legal and regulatory affairs for fi360, says that it is “notable” that Frank stated in his letter to Schapiro that “Congress wanted to ensure that a fiduciary standard for brokers would not be a ‘watered down’ standard.”
In crafting a fiduciary standard for brokers, the SEC will have to grapple with a number “thorny provisions” in Dodd-Frank, says David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington. First, he says, Section 913 of Dodd-Frank applies when a broker is providing “personalized investment advice” to “retail customers,” he says. “What do these terms mean?” he asks. Section 913 also states that the SEC may extend the fiduciary duty to “other customers,” Tittsworth says. “Will the SEC exercise this authority or will [the agency] only deal with ‘retail’ customers?”
Then there’s the portion of Section 913 that states “it will not be a violation of the standard of care, in and of itself, to engage in proprietary trades or to charge commissions,” Tittsworth explains. “Both involve potential conflicts of interest. How will the [fiduciary] standard of care treat these types of activities?”
