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SEC’s commitment to tougher broker rules questioned

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The Institute for the Fiduciary Standard said Thursday it has doubts about the SEC’s ability to formulate a fiduciary standard that will protect the interest of Americans trying to save for retirement.

Those doubts, according to Knut Rostad, president of the nonprofit Institute for the Fiduciary Standard, are based on a close examination of public comments made by various SEC officials and agency rulings.

The “culture” at the SEC, Rostad claimed, regards conflicts of interest as unavoidable and views the difference between the tougher fiduciary standard and the “suitability” standard to which the securities industry is held as minimal. 

There is “little ambiguity” about this point in the statements and actions of SEC officials, said Rostad, who argues the agency has taken a “new and benign view of conflicts” which holds they are “routine and acceptable — not inherently inconsistent with providing objective advice.”

“There is no consideration (at the SEC) for what is in the client’s ‘best interest,’ Rostad wrote in a paper released Thursday, “Conflicts of Interest and the Duty of Loyalty at the SEC.”

The SEC declined to comment on the institute’s claims.

Also read: SEC chief will push for tougher fiduciary rule

At a conference last month hosted by the Securities Industry and Financial Markets Association, agency Chair Mary Jo White said the SEC should “implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor.”

White’s announcement was embraced by SIFMA, which has lobbied aggressively against the Labor Department’s efforts to introduce its own version of the standard. “The SEC is the right agency to look at this topic,” said Ira Hammerman, SIFMA’s general counsel. “We have long advocated for the Department of Labor to stand down.” 

Barbara Roper, director of Investor Protection at the Consumer Federation of America, which backs a universal and strong new fiduciary standard, said the financial industry’s support of the SEC to take the lead “reflects their belief that they can get a weaker rule.”

The Institute for the Fiduciary Standard shares that concern.

In the paper, Rostad recalls the strong support former SEC Chair Mary Shapiro lent to a new fiduciary standard as early as 2009 and quotes SEC guidance issued as recently as 2011: “As a fiduciary, you also must seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of all material conflicts.”

But over the course of the past several years, the brokerage industry lobby has successfully influenced the thinking at the SEC regarding conflicts of interest, Rostad wrote.

Where the agency was once clear in articulating that conflicts must be avoided, now the agency is content in merely having them disclosed, he asserted.

While the SEC once held that conflicts of interest are inconsistent with objective advice, that view has been replaced with one that holds they are “far less important that previously believed,” according to Rostad.

Also read: OMB urged to give fiduciary rule full review

He cited SEC rulings, speeches and comments made by current and former officials as proof of the change at the agency. 

In three decisions in the past year against investment advisors, the SEC found revenue-sharing and compensation agreements that caused conflicts of interest were not adequately disclosed, he said.

But in all three rulings, the SEC did not mention nor allege the advisors’ failure to act in the best interest of the client, suggesting the advisors’ infraction was not in giving conflicted advice, but in merely failing to disclose it, Rostad wrote. 

He also cited remarks in a February speech by Julie Riewe, co-head of the Asset Management Unit Division of Enforcement at the SEC, in which she said, “Only through complete and timely disclosure can advisers, as fiduciaries, discharge their obligation to put their clients’ and investors’ interests ahead of their own.” 

That comment, according to Rostad’s interpretation, indicates a permissiveness of conflicts, so long as they are disclosed. 

He also cited comments by Robert Plaze, a former deputy director at the SEC, who said recently, “Disclosure and client consent will always satisfy the adviser’s duty of loyalty.”

That sentiment affirms an “evolving principle regarding the role of disclosure,” argued Rostad.

He also pointed to a 2014 commentary by David Blass, former chief counsel to SEC’s division of trading and markets, who wrote, “I don’t think that the adviser fiduciary duty is higher than suitability,” referring to the standard to which broker-dealers are currently held.

All of these comments and rulings, Rostad writes, indicate a “new and benign view of conflicts of interest.”

White, in announcing her support for a new fiduciary standard, suggested the agency would tread carefully and that it might be some time before it acts.

“If what we succeed in doing is, in effect, depriving investors of reliable, reasonably priced advice, obviously we have failed,” she said, adding:

 “You have to think long and hard before you regulate differently,” said White.

Earlier this year, Rostad’s institute rolled out 11 best practices for advisors designed to make it clear whose interests they serve. 

Among them: “Avoid significant gifts, third-party payments, sales commissions, or compensation in association with client transactions that cannot be directly credited back to the client or managed as a fee offset.”

Also read: 11 best practices for advisors


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