Despite Fiduciary Critics, Schapiro and Borzi Charge Ahead

Two of the nation’s top regulators—Mary Schapiro and Phyllis Borzi—continue to face a barrage of criticism over their decision to do what they believe is best for investors: expanding the definition of who’s a fiduciary.

While broadening the definition of fiduciary has many supporters, there are lawmakers and industry executives who vehemently argue that expanding the fiduciary definition is rife with unintended consequences, and that investors would likely suffer under a broadened standard by increased costs, limited choices and less access to financial advice. But despite these naysayers, both Schapiro, chairman of the Securities and Exchange Commission (SEC), and Borzi, head of the Department of Labor’s Employee Benefits Security Administration (EBSA), are charging ahead.

In his latest assault on the fiduciary standard being crafted by the SEC, Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, told Schapiro in an early August letter that the Commission has failed to “demonstrate that investors are being harmed by the current” fiduciary standard and that “harmonization” of advisor and broker rules would “enhance” investor protection.

Schapiro has stated a number of times that the SEC would move ahead with crafting a fiduciary standard for brokers after the one-year anniversary of Dodd-Frank, which hit on July 21. But Bachus argued in his letter that the SEC should instead be focused on the “mandatory” Dodd-Frank rulemakings, instead of pushing forward with a fiduciary rulemaking by “recalling examiners and reassigning them to write optional [fiduciary] rules.” The SEC should not be pressing ahead on the issue, the congressman said, because it has yet to provide Congress with “empirical data and economic analysis to justify” fiduciary or harmonization rules. Any action taken on these two fronts, Bachus said, “is premature” until the SEC answers these questions.

This isn’t Bachus’—or Congress’—first attempt to hinder Schapiro’s insistence on putting brokers under a fiduciary mandate, and it likely won’t be the last. In his letter, Bachus reminded Schapiro that Dodd-Frank does not mandate that the SEC put brokers under a fiduciary standard, only that it gives the regulator the authority to do so. What’s more, Bachus, like his counterpart Rep. Barney Frank, D-Mass., has urged Schapiro not to put brokers under the ’40 Act fiduciary standard that advisors must adhere to.

Bachus is also pushing legislation that would significantly alter the SEC’s structure. For good or ill, his SEC Modernization Act seeks to repair what he says is a flawed agency. The structure of the SEC “is the main problem,” Bachus said in introducing the bill, “and over the years Congress has only increased its dysfunctional structure through fragmentary and piecemeal amendments rather than the comprehensive reform that is needed.”

Bachus argues that throwing more funds at the SEC will not resolve the agency’s problems. He noted that the SEC’s budget this year stood at $1.185 billion, up 6% over 2010 “and nearly triple what it was a decade ago. Simply providing yet more funding to the SEC without first correcting its flaws will do nothing but prolong these inefficiencies and structural failures.” Further, he said that “without fundamental reform, there will never be any real improvement to the SEC’s operations.”

Most of the provisions in Bachus’ restructuring bill would amend Dodd-Frank, including Section 965, by consolidating the SEC Office of Compliance, Inspections and Examinations (OCIE) and its employees into the Divisions of Trading and Markets, and Investment Management. A new OCIE would be created within those divisions to house all examination, inspection and compliance staff. Each new office would have a deputy director who would report to their respective division director, the bill says. The SEC’s regional offices will report to the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.