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December 09, 2011 at 09:26 AM
In a Bloomberg interview, SEC Chairman Mary Schapiro said the agency would issue a proposed fiduciary rule in 2012 that would be “business-model neutral” and allow brokers working with retail investors to sell proprietary products and charge commissions. Industry officials say exactly how the SEC crafts this business-model neutral approach will be crucial to determining whether the agency actually ends up putting brokers under a fiduciary mandate.
“If by ‘business model neutral’ the intention is simply to make provision for commissions and proprietary product, I am neither surprised nor too concerned,” says Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., and a member of the Committee for the Fiduciary Standard. “That is assuming that the core elements of a fiduciary relationship are included” in the final fiduciary rule.” However, Evensky continued, “if by ‘business neutral’ the result is the one sought by many in the brokerage and insurance industry; i.e., redefine ‘fiduciary’ as enhanced ‘suitability’ with opt-out provisions, then we will end up with the worst of all worlds.”
Yet others say that taking a “business model-neutral” approach is the “balanced” way to go. While there’s no doubt that the SEC is “trying to walk a fine line given the political and economic realities” as it develops the fiduciary rule, says Brian Rubin, a partner in the law firm Sutherland Asbill & Brennan, “promoting a ‘business-model neutral’ formulation is a very balanced approach,” and is “consistent with what [Schapiro] has been saying for a while.” By contrast, Rubin said, a strict fiduciary standard “would have called into practice and likely prohibited” practices such as selling proprietary products.
Section 913 of Dodd-Frank allows principal-trading and proprietary products as well as charging brokerage commissions, says David Tittsworth (left), executive director of the Investment Adviser Association, and “It’s no secret that Section 913 of Dodd-Frank represented a compromise among competing interests.” The question of whether brokers should have the same fiduciary duty as investment advisors has been and “continues to be very controversial,” Tittsworth says, and “Section 913 reflects that controversy.”
Other industry executives were encouraged by Schapiro’s comments that a fiduciary rule will be business-model neutral. Dale Brown (left), president and CEO of the Financial Services Institute, says that FSI “has been calling for a uniform fiduciary standard since the beginning of the regulatory reform debate,” and that the independent broker-dealer group is still working “to ensure the proposal creates a new uniform fiduciary standard while maintaining client choice and client access to affordable advice.” With Schapiro’s comments, he said, “the SEC is showing a real willingness to understand our industry and our clients’ needs, which is refreshing.”