As the Securities and Exchange Commission continues to try and craft a fiduciary standard for brokers, including those who sell market-based insurance products, most think it is inevitable the standard will stand, and must stand for investors’ protection.
Section 913 of Title IX of the Dodd-Frank Act required the SEC to study the impact of changes to regulatory requirements that would eliminate the broker-dealer exclusion from the definition of “investment adviser” under the Investment Advisers Act of 1940.
Dodd-Frank does not require a rule, just the already-completed study. But internal pressure from the advisory and retail investment world is mounting for clarity and a standard rule—as has interest among private firms advisors and some consultants—for those selling life/annuity insurance and other investment products in the broker channel to live up to fiduciary standards, voluntary or otherwise.
The Financial Planning Coalition, which represents advisors, sent a petition to the SEC signed by more than 5,200 financial planning professionals urging it to apply a fiduciary standard to anyone providing personalized investment advice to retail clients. The Coalition—which consists of Certified Financial Planner Board of Standards, the Financial Planning Association, and the National Association of Personal Financial Advisors—represents financial planning professionals across the country.
While a rule for SEC oversight of brokers is expected this fall, it could be delayed for as long as another two years, thanks to a number of potentially major challenges.
One is the fact that the U.S. Court of Appeals for the D.C. Circuit has shaken its saber at the SEC in recent months, as have House Republican members on the Financial Services Committee, both zeroing in on doubts about the SEC’s use of empirical data to show economic effects of would-be rules.
Language in a July 22 decision by the D.C. Circuit that struck down an unrelated SEC rule allowing shareholder candidates for corporate boards found fault with the economic evaluation the SEC had applied in instituting the rule. The Administrative Procedure Act of 1946 requires the agency to consider the economic impact of a new rule.
The SEC did not return a call for comment on the fiduciary rulemaking process.
Meanwhile, smaller brokers and registered reps themselves are worried about the costs imposed by new compliance regulations.
Charles Symington, the head of government affairs for the Independent Insurance Agents & Brokers of America, said that if a new fiduciary duty were overlaid on top of suitability standards that already apply to broker-dealers and registered reps, it could drive some professionals out of business. Ironically, this would deprive investors of the sound advice they would otherwise get, Symington said.
Meanwhile, broker-dealers argue that they are already subject to fiduciary-like rules and are also subject to Financial Industry Regulatory Authority (FINRA) oversight.
An excellent example put forth by the broker community is a letter last year from Gateway Financial in Pittsburgh, to the SEC to inform the then-uncompleted study on the obligations of brokers, dealers and investment advisers.
“I currently am subject to an array of state insurance regulations and oversight for the sale of fixed and variable annuity insurance products,” stated the writer, Margaret A. Archinaco, director of client services at Gateway Financial, which applies life insurance in the areas of wealth and estate planning. She noted a variety of ongoing required and voluntary evaluations and training by dint of oversight by state insurance regulators and federally, by FINRA.
A fiduciary standard requires firms and people selling investment products to put customers’ interests ahead of their own. Insurance agents who sell products such as variable annuities have traditionally used a suitability standard, which requires that they verify that a product sold to a consumer suits the consumer’s needs.
But that does not mean that they are putting the customer first, just that the product is suitable. It does not have to be the lowest cost or the best one under suitability standards, but as some point out, it does under fiduciary standards.
Another setback for SEC rules, is the fact that this month, the U.S. Department of Labor went back to the drawing board to better fine tune the definition of fiduciary in use for Employee Retirement Income Security Act (ERISA) plans.
Phyllis Borzi, director of the Employment Benefits Security Administration (EBSA), an arm of the DOL, stated in a release that EBSA expects to make it clear in the revised update proposal that “fiduciary advice is limited to individualized advice directed to specific parties.”