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June 01, 2015 at 08:00 PM
In a wide-ranging session at the Envestnet Advisor Summit in Chicago in early May, MarketCounsel’s Brian Hamburger addressed many of the big regulatory and compliance issues facing advisors, and argued that one of the main issues is the regulators themselves. The Securities and Exchange Commission “hasn’t been doing its job for a long time. We haven’t had a strong securities regulator in the last 15 years,” he said in a breakout session that included Knut Rostad in the audience, which is why on the fiduciary standard for brokers the SEC has decided they “won’t be able to address this.”
Hamburger said that on the fiduciary issue, “a real battle is being raged here,” with the intent to deliver “overall harmonization” of RIA and broker regulation. “‘Harmonization’ sounds nice—who doesn’t want ‘harmony,’” Hamburger joked, but warned that for RIAs, harmonization is not a good development. It’s also not good for end clients. “Customers are confused,” he said, not knowing if they’re “dealing with a broker or advisor,” and moreover, “don’t know what difference it makes.”
While the fiduciary reproposal from the Department of Labor “gets the headlines,” the harmonization push “is starting to roll a rock down the hill.” If RIAs back a fiduciary standard for brokers, “you have to be ready for” the drawbacks of harmonization. That would include “taking all the rules BDs are subject to and applying them” to RIAs, including a continuing education requirement, reviews of advertising, and books and records requirements. Harmonization, he said, “is not a one-way street.” In fact, he argued that “if you align all of these things, I can assure you that FINRA will reappear quickly” and say regarding RIAs, “‘if they’re all subject to the same rules, it makes sense for us to examine them.’”
By contrast, he said the United Kingdom dealt with this issue “years ago,” to the point that as of this year, each advice giver “must decide whether you’re a broker or an advisor,” and based on that decision, “your registration will be different” as will “your standard of care” toward clients. That makes it easier for end clients to decide whether they “need incidental advice or a more conflict-free form of advice.” That change is now “in the midst of implementation” in the U.K., with “successes and failures across the board.”
On the fiduciary standard for brokers, Hamburger recalled that the original “Merrill Lynch Rule” really wasn’t an SEC rule at all, with the more accurately named broker-dealer exemption proposed by the brokerage industry as a “way to cure churning.” That industry figured out, however, that “since customers wanted advice,” they could charge a fee for their brokerage services that would “look and feel a lot like the way investment advisors charge.” The brokerage industry’s intent was reflected in its advertising at the time: “The ads back then didn’t talk about the quality of their clearing, but about advice.”
As for the Department of Labor’s proposed fiduciary rulemaking under ERISA, Hamburger said the DOL “did an end around since the SEC hasn’t been doing its job for a long time.”
Hamburger then called on Rostad, president of The Institute for the Fiduciary Standard, to voice his take on the prospects for a fiduciary standard being imposed on brokers by the SEC. “The status of fiduciary duty in Washington has gone downhill enormously over the past six years,” Rostad replied, in fact since the Obama administration released its white paper on a regulatory roadmap for financial services. “At the SEC, we’re far weaker than we were,” he continued, while the DOL’s proposal represents a “mixed picture” for fiduciary proponents and the brokerage industry. Over all, the DOL proposal is actually bleak for fiduciary proponents, since DOL’s inclusion of a proposed “best interest contract exemption,” or BICE, is a “loophole you could drive an aircraft carrier through.”
