Daniel Gallagher, one of the Securities and Exchange Commission’s two Republican commissioners, has been very vocal as of late regarding his belief that the agency doesn’t need to write a rule to put brokers under a fiduciary mandate.
In mid-March, Gallagher said that he’s “not sure a majority of the commission believes we need to use” the authority under Section 913 of the Dodd-Frank Act to write a uniform fiduciary rule, which SEC Chairwoman Mary Jo White has said the agency will determine this year.
Then in mid-May, he told IA that the debate over whether the SEC should write a fiduciary rule is “not fair right now” because of a mismatch in advisor/broker exam data—suggesting that a self-regulatory organization needs to be appointed to help the agency create a “real exam program” for advisors.
The debate over whether the agency should use its authority under Section 913 of Dodd-Frank to write a uniform fiduciary rule for brokers and advisors “has been colored by a view of brokers that’s decidedly negative,” Gallagher said. “If you talk to many of the consumer advocates and others, they will cite to you all of the transgressions of the brokers.”
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But “there are so many public displays of malfeasance in the brokerage industry because we [the SEC] resourced oversight of brokers so much more than advisors. Therefore, we know a lot more about brokers and their practices—we know when they are committing rule violations, and there are so many more [BD] rules to violate.”
In the Section 913 debate, Gallagher continued, “advisors are always seen as pure and brokers are seen as miscreants and especially now after Title IV of Dodd-Frank added so many more [private fund advisors] to our rolls; we simply don’t have a good enough understanding [of advisors] and the enforcement statistics that we have on the broker side so that we can have an informed debate.”
Gallagher reminded IA that he’s “been pretty clear that I don’t think we need to do a [fiduciary] rulemaking, so if it takes years until after we have a real exam program for advisors [to reassess a fiduciary rulemaking], that’s fine with me.”
In a speech in mid-May at the 46th annual Rocky Mountain Securities Conference in Denver, Gallagher said that the SEC’s failure to catch investment advisor wrongdoers as quickly as those in the broker-dealer realm is due to the lack of a self-regulatory organization for advisors as well as “unfunded mandates” imposed upon the SEC by the Dodd-Frank Act.
Gallagher noted in the speech the “eye-opening” results of recent statistics that he requested from the SEC’s Office of Compliance Inspections and Examinations, which were based on disclosure information submitted by broker-dealer registered reps on FINRA’s BrokerCheck system.
“An astounding 20% of the 600,000 plus actively licensed registered representatives have between one and five disclosures for items such as customer complaints, regulatory violations, terminations, bankruptcy, judgments and liens,” Gallagher noted. “One active—and currently employed—registered rep has disclosed a whopping 96 customer complaints and disputes. Another individual has made 21 financial disclosures relating to bankruptcies, yet still is licensed and working in the industry. At the firm level, 17% of broker-dealers had more than six total disclosures and 5% had more than 20 disclosures.”