SEC Wants Common Standard for Brokers, Advisers

Sunday, 23 Jan 2011 09:09 PM

 

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The U.S. Securities and Exchange Commission is recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice.

The SEC said there’s a need for a uniform fiduciary standard “no less stringent than currently applied to investment advisers,” according to the staff report delivered to Congress yesterday.

The agency was asked by Congress to study the effectiveness of current rules with the option of creating a universal standard as part of the Dodd-Frank financial services overhaul law enacted on July 21. Broker-dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when the product is sold, instead of the fiduciary duty imposed on registered investment advisers to put their clients’ best interests first.

Republican commissioners Troy Paredes and Kathleen Casey issued a joint statement opposing the study as written and its release. The report “does not adequately recognize the risk that its recommendations could adversely impact investors,” according to the statement.

They also argued against any immediate use of the report to justify SEC rulemaking. “Given the lack of concrete data provided in the study and the need for additional research and analysis, we believe that any rulemaking without such consideration would be ill-conceived at best and harmful at worst,” the statement said.

Investor Survey

Seventy-six percent of about 1,300 investors surveyed said they thought financial advisers, a term used by major brokerage firms such as Bank of America Corp.’s Merrill Lynch to describe their salespeople, must uphold a fiduciary duty to their customers, according to a study released in September by groups including the Consumer Federation of America and North American Securities Administrators Association, both based in Washington.

The Securities Industry and Financial Markets Association, the lobbying group for banks and brokerages, had said it supported a “uniform federal fiduciary standard” for those brokers dealing with retail clients. It had also said the existing standard should be revised since having brokers follow the same fiduciary standard as registered investment advisers, which is based on the Investment Advisers Act of 1940, is incompatible with the broker business model.

Continues Access

The study appears to preserve the ability of consumers to have access to various fee and account structures when investing, Ira Hammerman, general counsel for Sifma in Washington, said in a telephone interview yesterday. “I don’t see any major impediment to the continuation of the robust broker-dealer model, but that is something we will continue to be concerned about.”

The report also recognized the need for written guidance to broker-dealers and investment advisers on how the uniform standard would be applied, which is important as the SEC moves into the rulemaking phase, he said.

“If you are giving advice to an investor, regardless of the title on the business card, you should always be bound to do so in the best interests of the client,” SEC Commissioner Luis Aguilar said in a March 26 speech. Chairman Mary Schapiro said in a May 6 speech that brokers “should meet that same high fiduciary standard.”

There will be more litigation brought by the SEC under the uniform fiduciary standard because it will serve as a “new tool” to bring proceedings against brokerage firms and individual brokers, said Arthur Greenspan, an attorney specializing in SEC enforcement and securities litigation at Richards Kibbe & Orbe LLP in New York, before the report was delivered.

Total Assets

The SEC and the Financial Industry Regulatory Authority oversee about 5,100 broker-dealers, according to the SEC. In 2009, those registered with Finra held more than 109 million retail and institutional accounts, with about 18 percent of those brokers also registered as investment advisers with a state or the SEC.

Total assets managed by brokers registered with Finra and registered investment advisers were $10.37 trillion at the end of 2009, according to Boston-based consultant Cerulli Associates.

The SEC gave Congress three options to strengthen oversight of registered investment advisers in a separate report released Jan. 19.

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