By Cyril Tuohy
A majority of the five-member Securities and Exchange Commission (SEC) appears in favor of developing uniform fiduciary standards for stockbrokers that are in line with rules governing registered investment advisors.
SEC Chairwoman Mary Jo White, along with SEC commissioners Luis A. Aguilar and Kara M. Stein, are ready to back the development of a uniform fiduciary standard governing broker/dealers and investment advisors. All three are Democrats.
Commissioners Michael S. Piwowar and Daniel M. Gallagher, both Republicans, have hinted that they see no need to move to a rulemaking process to develop uniform fiduciary standards.
Barbara Roper, director of investor protection with the Consumer Federation of America, said Aguilar and Stein have “expressed their support for a strong, uniform fiduciary standard” governing personalized investment advice.
“At the same time, however, the two Republican commissioners have made it clear in their public statements that they question the need for rulemaking,” Roper said.
Roper delivered her comments during one of several meetings hosted by the Institute for the Fiduciary Standard. The institute is in the midst of its “Fiduciary September” program, intended to bring awareness to the importance of advisors’ following a fiduciary standard-to-care toward investors.
A 3-2 vote in favor of rulemaking, with White casting the tie-breaking vote, would order the SEC staff to develop uniform fiduciary rules. White has said she would like the commission to decide on whether to raise the standards for investment advice by the end of the year.
Roper, who has dealt with the SEC on the issue of advisor standards for many years, said that while the split among the commissioners makes it more challenging for White, “in another sense it could be viewed as liberating.”
“If the position of the Republican commissioners is and remains, in essence, ‘Just say no,’ then the chair can and should view herself as free from having to negotiate to win their support by watering down the standard,” Roper said.
Some advocates of a uniform fiduciary standard see the upcoming vote as a test of courage for White, who last month voted with the majority in favor of strengthening credit-rating-agency rules.
Her vote to strengthen those rules shows “that she is willing to do that when necessary,” Roper said.
Uniform fiduciary standards would raise the advice standard for brokers, also known as registered representatives, to a standard that is already required of registered investment advisors under the Investment Adviser Act of 1940.
Registered representatives who are paid to sell stocks and bonds often act as financial advisors. When offering retail investment advice, the representatives are required to meet a minimum standard of care known as a “suitability standard."
Advisors bound by the suitability standard say they offer advice that is good enough, and at a lower cost than registered advisors. As a result, they say, millions of investors are better off with suitable advice than with no advice at all.
David Certner, legislative counsel and legislative policy director for government affairs with AARP, said that argument was “simply a red herring.”
“The issue here is really getting people good advice, not advice that's subject to conflict," Certner said, "and the fiduciary standard already exists in the marketplace."
Proponents of the suitability standard who argue that bad advice is better than no advice put forth a “false choice,” Certner said. “Would we say that bad medical practice is better than no medical practice at all? Or bad legal advice is better than no legal advice at all?”
An SEC study issued in 2011 found that imposing a uniform fiduciary standard would benefit investors “regardless of whether they choose to work with an investment adviser or a broker/dealer,” and earlier this year the Office of the Investor Advocate reaffirmed that position.
SEC Commissioner Gallagher said in May that nothing had persuaded him of the need for a uniform standard to proceed to the rulemaking stage.
"I've got to tell you," Gallagher said, "I'm not yet convinced, based on anything I've seen or heard, whether it’s the study or what we've gotten feedback on from the economic analysis request, that indicates that we need to do a rulemaking."
Roper said that regardless of whether the SEC decides to authorize moving forward with rulemaking, raising advisors to the fiduciary standard should not be a partisan issue.
“But if Chair White must take a 3-2 vote to bring it about, so be it,” Roper said. “This is an issue of sufficient importance to the basic financial well-being of millions of investors that the chair must be willing to take that vote.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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