Harmonization Headache: Thornier Than Fiduciary?

After meeting with House Financial Services Chairman Jeb Hensarling, R-Texas, House Capital Market Subcommittee Chairman Scott Garrett, R-N.J., and the ranking member on the Senate Banking Committee, Mike Crapo, R-Idaho, Clark said each of them “believe that RIAs and broker-dealers are fundamentally two different business” models, and that “harmonization and the fiduciary standard should be separate and distinct.”

By the time you read this, the SEC’s comment period on its March 1 request for information will be coming to a close (it ends on July 5). Clark said that Schwab planned to include in its comment a survey of advisors who custody assets with Schwab and their views on the harmful consequences they see in harmonizing advisor and broker rules.

Indeed, David Tittsworth, executive director of IAA, said that IAA will also be “raising concerns” about harmonizing BD and advisor rules. “The fact of the matter is that investment advisors already are comprehensively regulated,” Tittsworth said. “Further, as we pointed out in our August 2010 comment letter on the [Dodd-Frank Act] Section 913 study, broker-dealer and investment advisor regulations differ but are substantially equivalent in key areas.”

Imposing broker-dealer rules on advisors, Tittsworth added, “is wrong-headed and unnecessary. Doing so would impose additional and needless costs on investment advisors without any additional investor protection.”

Bill Lowe, president of Sammons Retirement Solutions, weighed in with his comments on harmonization in a June 4 letter to the agency. While he noted that harmonizing BD and advisor rules “seems appropriate when both are providing similar services,” he wondered if a new fiduciary rule that included harmonization around “a principles-based model” would eliminate the rules-based model that BDs operate under.

In other words, Lowe said, “if a registered representative is providing advice and is held to a fiduciary standard (the same as an investment advisor), would they have different requirements for advertising, supervision, books and records, etc.? Would a self-regulatory organization, such as FINRA, be viable?”

If harmonization around a uniform fiduciary standard is desired, as SEC staff has stated previously (the agency’s 2012 Financial Report stated that the SEC would “continue to assess” ways to better harmonize advisor and BD rules when they are providing similar services), Lowe said, “it would be logical” that the SEC would seek to harmonize regulations around the following areas: advertising and other communications; supervision; dispute resolution; licensing and registration of firms; licensing and continuing education requirements; and books and records.

Harmonization in these areas, Lowe argued, “will also effectively level the playing field from a competitive standpoint. If under a uniform fiduciary standard one business model has higher costs due to regulatory compliance but both are held to the same standard of care, then obviously the one with less regulatory compliance has a built-in advantage from an efficiency and cost standpoint. Clearly, such a resulting dynamic would be an unintended consequence.”

But, as industry officials have said before, not every BD and advisor rule would necessarily fall under the harmonization sword. For instance, it has been argued previously that advertising is one area that deserves harmonization, as broker-dealers can air their client testimonials but advisors cannot.