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‘Faulty’ Analysis Could Torpedo an SEC Fiduciary Rule: Advocates

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Fiduciary advocates told Securities and Exchange Commission Chairwoman Mary Jo White in a recent letter that the upcoming release of the agency’s economic analysis of a fiduciary rulemaking must be “thorough and well-reasoned” and meet six criteria, as a “faulty analysis could doom or further delay” prospects for fiduciary reform.

In their Nov. 21 letter, the Financial Planning Coalition — the Financial Planning Association, the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards — as well as the Consumer Federation of America and Fund Democracy Inc., provided to White, the SEC commissioners, as well as to Mark Flannery, the head of the agency’s Division of Risk Analysis, what they view as “key elements” that must accompany the expected release early next year of the economic analysis.

The pro-fiduciary groups laid out the following six areas where they say the Commission “has gone astray in the past,” which has resulted in the agency being “either unwilling or unable over the past 25 years to develop a rational policy framework for the delivery of personalized investment advice to retail investors.”

The analysis must include the following elements, the groups said in their letter, if it is to provide “an appropriate foundation for sound regulatory policy.”

The analysis must:

–Accurately depict the differences between the suitability standard that applies to sales recommendations and the fiduciary duty that applies to investment advice; 

–Correctly identify the investor harm that regulation is intended to rectify;

–Clearly describe the regulatory conditions that permit that harm to occur;

–Comprehensively describe the form that harm takes and the means by which the harm occurs (although the Commission cannot reasonably be expected to quantify the total costs to investors of that harm);

–Clearly identify the regulatory alternatives available to address that investor harm; and

–Assess the likely effectiveness of the various possible approaches to reducing investor harm in analyzing regulatory alternatives.

The pro-fiduciary groups also said that as the agency assesses the economic impact of various possible regulatory approaches that it could pursue in lieu of a fiduciary rulemaking, the agency “must look not just at the potential costs to industry but also to the potential of each approach to significantly reduce investor harm.” Said the groups: “This is true for regulatory approaches that stop short of imposing a uniform fiduciary standard, as well as for those that would apply a fiduciary standard to all personalized investment advice to retail customers. 

The agency stated recently that it would evaluate next year “recommendations from a staff report to consider a uniform fiduciary standard” for advisors and broker-dealers “as well as finding ways to harmonize rules for advisors and brokers.” White said on Nov. 10 that she would soon “clarify” her stance on a fiduciary rulemaking, despite the fact that the agency has not yet decided “whether to do something or what to do” regarding such a rulemaking.

Fiduciary advocates have been urging White to move forward with a fiduciary rulemaking on a split 3-2 vote.

SEC Commissioner Michael Piwowar, who previously served as the Republican chief economist for the Senate Committee on Banking, Housing and Urban Affairs under Sens. Mike Crapo, R-Idaho, and Richard Shelby, R-Ala., said in a Sept. 30 speech that while he has “not made a decision about whether I would or would not support a uniform fiduciary duty, … based on the data available to me now, the potential benefits seems elusive and the potential costs sky-high.” Therefore, Piwowar said, “we need to take a measured and deliberative approach to the standard of care issue.”

Said Piwowar: “Before adopting any new rules or rule amendments, the Commission has to consider ‘What are the marginal benefits and what are the marginal costs?’”

But Barbara Roper, director of investor protection for the CFA, told ThinkAdvisor that while Piwowar “claims to maintain an open mind on this [fiduciary rulemaking] issue, and we certainly hope he does … his comments reflect exclusively the views of the most extreme opponents of regulation.” Piwowar, she said, ”would have to completely change his outlook on the issue to arrive at a position of support.”

— Check out White Promises ‘Clarity’ on Fiduciary on ThinkAdvisor.


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