To hear Duane Thompson tell it, now that the Republicans have control of the House of Representatives, a bill authorizing a self-regulatory organization for investment advisors any time soon is unlikely. As the senior policy analyst at fi360 and president of Potomac Strategies LLC, a legislative and media relations consulting firm in Washington, D.C., recently told me (see my Aug. 16 blog on AdvisorOne.com): “I’m not sure we’ll get something this year, or even next year. And then, there’s the 2012 elections, which could change the whole landscape.”
This is good news in the minds of many independent RIAs, who fear the all-too-real specter of FINRA assuming the role of regulator of all registered investment advisors—with its cost and draconian bureaucracy driving up the already increasing cost of doing business. But even with an SRO on the shelf for the time being, that still leaves the issues of a fiduciary standard for brokers and the related “harmonization” of broker and RIA regulation. Congressional action on these issues appears less likely as well, due to a lack of enthusiasm for the fiduciary standard by House Republicans. Or at least, that’s what I would have thought, had I not read the July 14 comment letter to the SEC by the Securities Industry and Financial Markets Association.
SIFMA’s comment letter is a curious document, both in its uncharacteristically defensive tone, and its hand-wringing concern over the possibility that the SEC will act to remedy the broker fiduciary standard issue (as instructed under Dodd-Frank) by simply recommending the elimination of the “broker exemption” to the Investment Adviser Act of 1940. What’s more, in its apparent scrambling to concoct a viable alternative to dropping the exemption, SIFMA’s suggestions lack the usual polish and seeming common sense of its typical position papers, culminating in stretching the definition of “harmonization” to Clintonesque proportions (“It depends on what the definition of ‘is’ is…”) and invoking a defense of “separate but equal” standards.
To my mind, eliminating the broker exemption has always been the simplest and most direct way to implement a fiduciary duty for brokers by removing brokers who offer personal investment advice from a regulatory framework that doesn’t work to protect consumers, and placing them into one that does. Yet, I’ve also been of the opinion, as have all the observers with whom I’ve talked, that this solution was as dead as Tiger Wood’s golf game. But with it’s massive Washington lobbying staff and close ties to FINRA and the SEC, SIFMA undoubtedly has a solid basis for its concerns—which can only mean good news for a genuine and uniform fiduciary standard.
The comment letter leaves little doubt that the securities industry is genuinely concerned: “Our members are also concerned that the SEC could take the unnecessarily narrow view that, because Section 913 of the Dodd-Frank Act requires that the uniform fiduciary standard be ‘no less stringent than’ the general fiduciary duty implied under Section 206 of the Advisers Act, the SEC’s latitude and ability to establish a separate, unique uniform fiduciary standard is limited. […] We believe that a wholesale extension to broker-dealers of the general fiduciary duty implied under the Advisers Act is not in the best interests of investors and is problematic for the broker-dealer business model.”
Particularly troubling is what SIFMA feels should not be included under the definition of “personalized investment advice”:
• “Providing general research and strategy literature”
• “Discussing general investment and allocation strategies”
• “General marketing and education materials that are not specific to a customer”
• “Financial planning tools and calculators that use customer information but do not recommend specific securities”