While SEC Chairman Mary Schapiro said in mid-December comments first reported on Bloomberg that the agency would issue a proposed fiduciary rule this year, she also stated in the Bloomberg interview that a fiduciary rule proposal will 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, “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.”
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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.”
A strict fiduciary standard, Rubin adds, “would have called into practice and likely prohibited many common practices such as selling proprietary products.”
The SEC has been receiving pressure from Congress and broker-dealer trade groups since Dodd-Frank was written into law about how the agency should write an expanded fiduciary standard. Rep. Barney Frank, D-Mass., ranking member on the House Financial Services Committee, told SEC Chairman Mary Schapiro in a May 31 letter 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 [of 1940] standard on broker-dealers, but to ensure the new standard would not be a ‘watered down’ version of the investment advisors’ fiduciary standard.”
Section 913 of Dodd-Frank allows principal trading and proprietary products as well as charging brokerage commissions, says David Tittsworth, executive director of the Investment Adviser Association in Washington. “It’s no secret that Section 913 of Dodd-Frank represented a compromise among competing interests,” he said.
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.”
Indeed, Knut Rostad, president of the Institute for the Fiduciary Standard, adds that while Dodd-Frank “states clearly that commissions and proprietary products ‘in and of themselves’ do not presumptively breach the fiduciary standard,” Section 913 “does not state that any particular commission transaction and its facts and circumstances are ‘protected’ from fiduciary requirements.” Like a non-commission transaction, Rostad continues, “it needs to be evaluated on its own merits. In this sense, there is less than meets the eye in applying ‘business model neutrality.’”